Here’s everything you need to know about how U.S. tax relief for small business programs will affect your 2022 tax return.
To say that the past few years have been challenging for U.S. small businesses is an understatement. To help self-employed individuals and business owners weather pandemic challenges and continue operations, the U.S. government spent billions in tax credits, loans, and tax rule modifications. While these small business tax modifications can help reduce the income you pay taxes on, they are not as straightforward as getting a check in the mail.
Many of these relief programs will affect your small business taxes, making tax filing for 2020, 2021, and 2022 different than any years in the past. To help, you’ll find a summary of the aid below and what it means for your small business when filing taxes.
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Available Tax Relief For Small Business Owners
To help support small business owners through the COVID-19 crisis, the following acts were established. As a result of these pieces of legislation, business owners are now able to claim tax credits that allow them to redirect much-needed business income back to their company.
Families First Coronavirus Response Act (FFCRA)
The first significant act passed to help American employees and their families was the Families First Coronavirus Response Act (FFCRA). It focused on mandating sick leave for employees and expanded paid family leave. It also gave employers a tax credit for providing these benefits.
Coronavirus Aid, Relief, and Economic Security Act (CARES)
In March 2020, the $2.2 trillion CARES Act was signed into law, providing a range of support initiatives. A substantial number of tax relief initiatives were created to support small businesses, especially as many were required to close for a period of time. This act is responsible for many of the small business relief programs covered in this article.
Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA)
In December 2020, the $900 billion CRRSAA was signed into law. It answers some questions regarding small business tax treatment from the CARES Act programs and provides more funding for small business relief programs.
Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR)
The TCDTR was also enacted in December 2020 and made several changes to the Employee Retention Tax Credits initially created by the CARES Act.
American Rescue Plan Act (ARPA)
In March 2021, Congress passed the American Rescue Plan Act of 2021. While many of its tax provisions applied to individual tax returns, it extended several small business tax credits put in place by the CARES Act.
Loan Programs, Tax Credits, and Tax Changes
Here’s a list of 5 programs, tax credits, and tax changes to help American small business owners make ends meet during the COVID-19 pandemic. You may find that these changes will drastically affect the small business tax deductions you take for certain tax years.
Paycheck Protection Program
The Paycheck Protection Program (PPP) was the headline of the CARES Act. Created to encourage businesses to maintain payroll, it offered loans to cover payroll and other business expenses. While these were low-cost loans used for business purposes, the main draw was that they were forgivable as long as certain criteria were met. Not only that, the forgiven business loan was not considered taxable income, and any business expense paid with its proceeds counted as a tax deduction.
You could draw up to 2 PPP loans. The deadline for applying for these loans was originally March 31, 2021, but was later extended to May 31, 2021.
Although the Small Business Administration (SBA) has a lender match tool available to help small business owners find a lender to work with, these loans weren’t provided directly through the SBA. You can learn more about both PPP draw options on the SBA website.
Small Business Tax Credits for Extended Paid Leave Benefits
The FFCRA created 2 additional forms of extended paid sick leave available to employees:
- An employee who is sick or quarantined due to COVID-19 could receive 2 weeks (up to 80 hours) of paid leave benefits. The paid leave is up to $511 per day or $5,110 in aggregate.
- An employee caring for someone who is quarantined or a child whose school or childcare is closed can receive two-thirds of their pay, up to $200 per day, up to $2,000 in total.
In addition to the paid sick leave, the IRS incentivized employers to provide expanded paid family leave to employees caring for someone who was quarantined or a child whose school or childcare was closed. The employee could receive up to two-thirds of their pay, up to $200 per day for 10 weeks ($10,000 in total).
Employers who paid these family and medical leave benefits were eligible to receive a fully refundable tax credit equal to the required sick leave benefit payments. These small business tax credits were initially available for paid leave benefits through March 31, 2021. However, the ARPA extended these credits to September 30, 2021. It also increased the per-employee limit from $10,000 to $12,000 for up to 12 weeks of paid family leave.
For more information on COVID-19 small business tax credits for paid leave, see this FAQ.
Employee Retention Credit (ERC)
As part of the CARES Act, a tax credit was created to incentivize businesses to keep employees on the payroll. A business was eligible to receive a payroll tax credit if they kept employees employed despite a business closure or decline in business receipts. This small business tax credit was worth up to $5,000 for 2020.
The TCDTR and the ARPA extended and expanded the ERC, making it worth up to $7,000 per employee per quarter for 2021. It’s not available for wages paid in 2022.
When this small business tax credit was initially created, businesses couldn’t use both the Employee Retention Tax Credit (ERTC) and the PPP Loan. However, the CRRSAA has changed that. Businesses could take advantage of both the PPP and ERTC, so long as the 2 programs weren’t used to cover the same payroll costs. Learn more here.
Net Operating Loss Carryback Rules
Prior to the Tax Cuts and Jobs Act of 2017, businesses were allowed to carry back any net operating losses (NOL) to prior tax years. Amending tax returns permitted them to carry back their losses for 2 years.
When you carryback losses to prior years, you are able to deduct the losses from previous years’ profits. This results in an immediate refund from prior year taxes paid, giving struggling businesses a cash boost to help them get through a tough business year.
But once the Tax Cuts and Jobs Act went into effect, options for dealing with NOLs were limited. Businesses could no longer carry losses back and were limited in how much they could carry forward each year.
The CARES Act allowed businesses to carryback losses from 2018, 2019, and 2020 for five years. It also removed the limit on any losses carried forward from 2018 and 2019. With this carryback allowance, small businesses or self-employed individuals that recorded a loss in 2020 could amend prior-year tax returns to carryback losses and potentially receive a refund in taxes paid.
For the most up-to-date information, check out the IRS website.
Pandemic Unemployment Compensation
Independent contractors and self-employed people are usually not eligible for unemployment assistance. Under the CARES Act, that changed. Individual states were given the option to expand unemployment benefits to independent contractors and self-employed people who lost self-employment income during the health crisis.
Benefits were also increased. Initially, an additional $600 per week was provided for up to 13 weeks through July 31, 2020. Once that ended, the Lost Wages Assistance Program provided an additional $300 per week to support wages paid.
These benefits were extended again in January 2021 to provide an additional $300 per week, for up to 11 weeks through September 6, 2021, although some states opted to end their participation early.
It’s important to note that unemployment benefits are typically taxable income. For 2020, the ARPA made the first $10,200 of unemployment benefits tax-free for taxpayers with adjusted gross income less than $150,000.
However, all unemployment benefits are taxable in 2021 and 2022, so anyone receiving these payments must either make estimated tax payments or have taxes withheld from the unemployment payment.
Unemployment benefits are administered through your state. Check with your state unemployment insurance office to see what benefits you qualify for.
Preparing for Tax Season as a Small Business Owner
If you were able to take advantage of these tax relief programs, you’ll have some significant changes to your tax bill. Here are 3 ways to prepare your 2022 tax return with confidence.
Use Automated Accounting Tools
As a small business owner, it’s crucial to have accurate numbers, especially if you prefer to file your taxes on your own. But calculating all your business expenses and other crucial numbers yourself in an Excel spreadsheet can lead to costly data discrepancies. Cloud-based accounting solutions, like FreshBooks, make it easy to automatically track your income, capture receipts for tax-deductible expenses, and pull all the reports you need to complete your tax return.
Get Your Books in Order With a Bookkeeper
Working with a professional all year round can help you keep your books in good standing come tax season. If things are a bit disorganized this time around (no judgment!), our bookkeeping partners at Bench can help.
Leave Your Tax Return to the Professionals
Don’t have time—or want—to do your taxes yourself? Try Taxfyle. They pair you with professional CPAs or Enrolled Agents to make working with a tax professional simple. They may even be able to find more small business tax deductions to take advantage of and help you reduce your tax bill even more. Learn how Taxfyle can take end-of-year tax filing off your plate here.
This post was updated in December 2022.