If you are the owner of a small business with less than 500 employees, the US Department of Treasury has made certain tax concessions available that may apply to you. These tax incentives can make a huge difference to your tax bill and save you money while supporting the operation of your company. We provide details of these tax credits for 2022.
Covid-19
The Covid pandemic had a marked impact on the economy and small businesses often fared the worst. Employees who contracted the virus took sick leave and family responsibility leave if their family members were affected. Getting vaccinated also necessitated some time off work. Some employees had a negative reaction to the vaccines and were also booked off sick. Small businesses still had to pay these employees their full wages despite losing this productive time.
The employer is required to contribute towards Medicare tax. The tax concessions apply to this share of healthcare insurance, with a full refund if the employer’s leave and special leave payments were more than what they paid for Medicare. This tax credit is regulated by the American Rescue Plan Act of 2021 (ARP).
Where the employee was off work on paid sick leave, the employer is reimbursed at 100% of the wage rate for a period of two weeks (equivalent to 80 hours) up to a maximum of $511 per day or a total credit of $5,110 for each employee. Family leave is calculated at two-thirds of the wage rate for 12 weeks. The limit is $200 per day or a total of $12,000 per employee. Where certain benefits are greater due to collective bargaining, for example, a bigger portion of Medicare, and these are considered as long as they do not exceed the limit amounts.
These tax credits also apply to employers who are self-employed. In case you did not take advantage of this scheme in 2021, speak to your tax consultant to have it addressed retrospectively. The US Department of Treasury has allowed for this.
Research and Development Tax Credits
Research and Development (R&D) is an essential component of any economy. Innovation allows a country to compete in the international arena. The United States has experienced a significant drop in its investments in R&D, which started to slow down in 2016 and contribute comparatively less to the GDP (Gross Domestic Product).
This important area of investment was already targeted by the government in 1981. Businesses received a tax credit for employing staff for R&D and undertaking these projects. The initiative continues to this day. Where companies are unsure about how to carry out research and development, they can get assistance from a consultant. This Tri-Merit R&D Tax Credits resource, for example, will ensure that they complete all the necessary steps for a full claim.
Paycheck Protection Program Loan Forgiveness
The Paycheck Protection Program (PPP) was an initiative of The US Small Business Administration (SBA). This loan scheme was one of the ways that they assisted small businesses with relief due to Covid-19. Recipients could make a First Draw PPP loan as well as a Second Draw PPP loan. The loans were available up to May 31, 2021. But small business owners and employers can still benefit if they took the loans.
So, how can businesses that were granted these loans continue to have an advantage? They can qualify for the Paycheck Protection Program (PPP) loan forgiveness. Employers can receive 100% forgiveness of their PPP loans (First Draw PPP loans and Second Draw PPP loans) provided they meet certain criteria. Firstly, all their employees had to be retained during the pandemic and this had to be for their full salaries and benefits.
Secondly, the loans had to have been used for the approved budget items. The loans were intended to assist employers during the Covid pandemic by offering loans to cover salaries and benefits, rental of accommodations, interest on a mortgage, the cost of utilities, measures to protect employees from the virus, and property damage caused by vandalism or looting.
Thirdly, 60% minimum of the loans had to go towards payrolls. All these conditions had to be met in the eight to 24 weeks after receipt of the loan(s). Fourthly, the full loan amount that an employer is claiming forgiveness for had to have been spent. A claim can be made at any stage thereafter, up until the loan matures, after which normal payments would begin.
An added bonus is that employers will not be taxed on the loan amount as part of their gross income. Expenses for the business that were paid with the loan can also be deducted.
Business Meals Deductions
From 2021, and including 2022, business meal deductions are set at 100%. This means that you can claim these back in full on your tax. The only proviso is that such meals must come from a restaurant, whether the meal was consumed on the premises, delivered to work, or fetched as a takeout.
Vehicle Concessions for Business Travel
You can claim 58.5 cents for every mile you traveled in 2022 as a self-employed business owner as long as it was for business purposes. The rate in 2021 was 56 cents. A log must be maintained to provide proof of business mileage. This is especially important if you use the same vehicle for private and business trips.
Special Retirement Options
If you are self-employed, your retirement savings can net you a concession. This applies to schemes such as 401 (k)s one-participant plans, SEP IRAs, and Solo 401 (k)s. The latter is for a business owner who has no employees although the plan can cover their spouse as well. This allows you to borrow money from your retirement scheme with a grace period to refund it while applying for a tax deduction on your current submission.
Home Office Deduction
Most self-employed business owners operating from home are aware that they can get tax concessions on items such as rent and utilities. But a little-known fact is that if you purchased furniture or equipment for your home office and have not benefitted from a business expenses tax deduction for these, you are entitled to a deduction based on their current market value. For example, if you purchased a laptop or desktop a few years ago for $4,000 and have never claimed for it, you can get a home office deduction based on its present worth. You will have to provide the original proof of purchase receipt.
Look around your home office and take stock of any items for which no tax deduction has been claimed. You may find a number of items you can now submit for a rebate. Always retain all slips for our business. You never know when it will come in handy. Just make sure you have a good filing system so that records are easy to locate.
Taxable Income When Carrying a Loss Forward
If your small business operated at a net loss in the preceding year, and this loss is carried over to the present year in which you are reporting your taxable income, the amount of taxable income will be cut off at 80%. For example, if your taxable income for this tax assessment is $80,000, and last year a loss was incurred that is brought forward, you will only be taxed on $64,000 (80% times $80,000).
The Charitable Contribution Rule
The concession on donations has increased from 10% in the previous year to 25% now. If foodstuffs are donated, the rebate has moved from 15% to 25%. This only applies to C corporations.
As you can see, there are many ways to reduce your tax bill.