2021 has been a challenging year to navigate through supply chain issues, labor shortages and other difficulties brought on by the pandemic. Fortunately, legislation has provided some economic and tax relief to businesses. The following sections provide an overview of some changes made and business tax planning opportunities.
Employee Retention Tax Credit (ERTC)
The ERTC was introduced in March of 2020 to encourage employers to retain their employees during the pandemic. The credit was intended to go through the end of 2021 but was recently eliminated early to exclude wages paid in the fourth quarter. The IRS has recommended corrective action for those employers that already claimed the ERTC for fourth quarter payroll taxes.
Paycheck Protection Program Loan Funds
Businesses that received a PPP loan can still apply for forgiveness. Recipients can file a simplified loan forgiveness application for loans under $150,000. Forgiven loans are not included in taxable income and expenses related to the use of those funds are still allowed. If expenses paid in 2020 with ther PPP loan were not deducted on the 2020 return, then they can be deducted on the 2021 return rather than filing an amended 2020 return.
Meals and Entertainment Expense
The Consolidated Appropriations Act (CAA) passed a more favorable tax rule for meal expenses in hopes of boosting sales for restaurants. In prior years, businesses could deduct 50% of qualified meal expenses. For 2021, 100% of the deduction is allowed when proper documentation is provided. Qualified meals include dining in and takeout where the food and drink is prepared for consumption; the business cannot primarily sell pre-packaged foods. Entertainment expenses continue to be disallowed for tax purposes.
Net Operating Loss Carryback & Carryforwards
For the 2020 tax reporting year, businesses were allowed to use their current losses against prior year income for quick refunds. Net operating losses from years 2018-2020 were allowed to be carried back up to 5 years against previous income in order to obtain prior year refunds. For 2021, business losses will only be carried forward as a net operating loss.