Congress passed regulations in December that made several changes to business tax deductions and incentives. They aren’t only in favor of big companies and corporations — small business owners can take advantage of these just the same.
One of the major changes brought by the Consolidated Appropriations Act is that businesses borrowing through the Paycheck Protection Program (PPP) are now allowed to both receive a loan and claim the employee retention tax credit. Under the original CARES Act passed at the start of the pandemic, businesses had to choose one or the other.
1. PPP borrowers can now also claim the employee retention tax credit
This changes the original rule that restricted businesses receiving PPP loans from claiming the Employee Retention Credit (ERC). There is still one important stipulation though: the loan and tax credit are to operate separately, meaning a company may not include wages paid with a PPP loan when claiming the ERC.
To receive the ERC, which is available per quarter through July 1, companies had to either pay employees during suspended operations or see a decline in revenue.
There are a few changes in eligibility and calculations. Businesses must now show a 20% decrease in gross receipts in 2021, compared to the same quarter in 2019. Last year, the requirement was a 50% decrease.
To get the deduction, companies can claim 70% of their quarterly wages, up from 50% last year. The maximum credit increased from $10,000 per employee in all of 2020 to $10,000 per employee per quarter in 2021.
2. PPP borrowers can also claim R&D tax credits
Research and development (R&D) tax credits are essentially one way the US government invests in new technologies and innovation, typically saving businesses thousands of dollars to continue developing and improving their products.
“How you make it greener, quicker, cleaner, cheaper,” Dean Zerbe national managing director at alliantgroup said. “It’s the most robust business credit we have in the country.”
And you don’t have to be Amazon or Google to benefit from this reward. Zerbe said that small- and medium-sized businesses don’t take advantage of R&D tax credits nearly as much as they could — most just aren’t aware of the opportunities at the state or federal levels. As he put it broadly, any company that builds and enhances things should look into it, from technology and manufacturing to food production.
In some cases, the credit can be applied retroactively, so if you’re looking for ways to save money after a tough year financially, it might be worth hiring an accountant to review how your operations are already checking off boxes in research and development initiatives.
Businesses may now use PPP-funded expenses in their payroll calculations for R&D tax credits.
3. The 179D energy-efficient building tax deduction was made permanent
The 179D tax deduction benefits companies that construct or renovate energy-efficient commercial buildings. Businesses that qualify for this designation can get a tax deduction of $1.80 per square foot.
Zerbe said the new bill also raises the bar for what work qualifies as energy-efficient and now that the deduction is permanent, it will be easier for companies to plan for it. “This $1.80 is going to make it more meaningful for businesses that own their building to take further advantage of it,” he said.
The incentive not only benefits a company that owns or leases their building. Architects, engineers, and contractors can receive the deduction if they make energy enhancements on government-owned properties such as schools, libraries, courthouses, and military bases.
4. Excise alcohol tax break made permanent
Distillers, beer brewers, and wine makers will now benefit from a permanent reduction in federal excise taxes. The tax is based on how much alcohol is produced, benefitting small distillers as opposed to large companies.
According to the Alcohol and Tobacco Tax and Trade Bureau (TTB), taxes on beer start at $3.50 per barrel for the first 60,0000 barrels sold or imported and taxes on liquor start at $2.70 per gallon for the first 100,000 gallons sold or imported. Wine is taxed based on alcohol volume, starting at $1.07 per gallon. The TTB has a full table of tax rates and credits here.
5. 'Three-martini lunch' tax credit increased through 2022
The business meals tax credit, commonly known as the “three-martini lunch,” has been temporarily increased from 50% to a full 100% deduction. The rule applies to any food or beverage provided by a restaurant before January 1, 2023.
Prior to the 1980s, fully-deductible lunches often laden with cocktails were considered “ordinary and necessary” means for courting business clients. But the deduction came under fire more recently as an item on former President Donald Trump’s agenda. Some economists say increasing the deduction will be ineffective in reviving the restaurant industry, while benefiting the rich.
But accountant and partner at Prager Metis, Martin Davidoff said businesses of all sizes can benefit from tax-deductible meals. “We in small business can’t have a stadium named after us. We can’t run Superbowl commercials,” he said. “We instead rely upon one-on-one communications and that’s done over meals.”
There are strict rules to protect the deduction from abuse. Meals cannot be lavish or extravagant, they must be provided to a business associate, and an employee of the taxpayer must be present. The latest bill from Congress doesn’t specify whether meals can be ordered for take-out, considering many US restaurants are still closed for indoor dining. But Davidoff sees a case for it as long as the restaurant would normally serve food in a dining area — so no ghost kitchens or delis.
6. Work-opportunity tax break extended through 2025
The work opportunity credit incentivizes businesses to hire disadvantaged groups, such as the formerly incarcerated, long-term unemployment recipients, veterans, and summer youth.
Depending on the group, a company can reduce its federal income tax liability by up to $9,600 per eligible employee hired. There’s no limit on how many employees a company can hire under this program.
Zerbe said this credit is often only used by big corporations like McDonalds and Walmart because the training and programming required to qualify often deters smaller companies from taking advantage of it. But he said small- and medium-sized businesses should “absolutely take a look” at using it.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.