Capturing tax credits and incentives on a net basis in the United States is more advantageous than not doing so.
Regardless of where your organization operates globally, the business is more than likely eligible for one or more current tax programs, on top of the dozens of lesser-known and more complex tax credit and incentive opportunities. (A program can either be ongoing and current or can be expired.) In the case of an ongoing program, it can be taken advantage of in the current year assuming all prerequisites are met, and, in the case of an expired program, some are available to take advantage of retroactively by amending prior year(s’) tax filings (assuming all other prerequisites are met, and the amendment falls within the Internal Revenue Service (IRS) allotted timeline, typically three years after the date of filing particular year’s tax return). While many businesses are eligible for such credits, small businesses have a considerably disproportional need and are in the best position to benefit from taking advantage of such measures. The following items may drive decision making: capital reserves and the ability to stay afloat, industry, geographical location, timing, hiring trends, and more.
Starting in 2020, COVID-19 wreaked havoc on businesses, financially and operationally. Small businesses in particular experienced downtime, decreased demand, shortened working hours, issues with third-party logistics, and expenditure increases. All these factors led to significant negative operational and financial effects.
THE CARES ACT (COVID)
In the U.S., the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by the president in the first quarter of 2020. The CARES Act provides assistance to businesses (even tax-exempt organizations) that were negatively affected by the pandemic. Based on the definition of the Small Business Administration, approximately 99% or 30 million of all U.S. companies fall into this category. As such, CARES disproportionately affects small businesses. As it stands now, businesses that qualify for an employee retention credit (ERC) under CARES are eligible for up to $26,000 per employee. It’s a refundable tax credit against employer payroll taxes (excess of credit over payroll taxes owed for the given period is refunded via a check). That $26,000 is made up of two components, which are $5,000 for year 2020 and $21,000 for year 2021. The following is an overview of the breakdown of credit value:
The credit can reach 50% of up to $10,000 in total wages earned per employee (including some health plan costs) for the period of April to December 2020. This equates to $5,000 of the $26,000 CARES ERC.
The credit can reach 70% of up to $10,000 in wages earned per quarter per employee (including some health plan costs) applicable to the first three quarters of 2021. This equates to $21,000, or the remainder of the $26,000 CARES ERC.
The following is an overview of eligibility:
Either: A partial suspension or adverse impact to the operation of business during any calendar quarter due to governmental orders limiting commerce, trade, functionality, operating hours, capacity, travel, meetings, supply chain management and logistics, among the other financial and operational factors.
Or: Gross receipts in 2020 had to decline by 50% over 2019 in order to be eligible for the 2020 CARES credit.
Gross receipts in 2021 had to decline by only 20% over 2019 in order to be eligible for the 2021 CARES credit.
If your business participated in the Paycheck Protection Program, it’s still eligible.
Timely capture of the CARES credit within the confines of the three-year IRS statute of limitations for amendments, which is approaching. This credit expired and can only be claimed via filing amended tax forms.
As an example, per CARES ERC, an eligible and qualified small business with 200 employees may generate a refundable credit of up to $5.2 million in accordance with CARES.