It can be significant for businesses of all sizes to work on tax planning at the end of every calendar year for potential tax credit opportunities and to prepare for filing taxes with complete financial records.
End-of-year tax planning could help business owners take advantage of tax credits and tax deductions, and manage revenue and expenses.
Employee Retention Tax Credit: COVID-19
In January 2021, the IRS extended the Employee Retention Credit, which was created in 2020 with the intent of helping businesses keep employees on the payroll during the pandemic.
For qualifying businesses with a financial impact from the pandemic, the Employee Retention Tax Credit (ERTC) is a refundable tax credit of up to $14,000 per employee in 2021.
Who is eligible? To be eligible for the ERTC, all employers and tax-exempt organizations of any size must meet one of the following qualifications outlined by the IRS:
A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).
Employers should keep accurate payroll records and payroll tax returns for backup documentation to claim 2021 credits.
Employee Retention Tax Credit: Qualified Disasters
For past natural disasters, the IRS has allowed businesses affected by a qualifying major disaster to claim an employee retention credit.
This was allowed for businesses that continued to operate in a declared disaster area, became inoperable because of that disaster, and continued to pay their employees.
The IRS has not announced if they will allow the ERTC for businesses in the Hurricane Ida disaster zone, which would include all of Louisiana and some of Mississippi or for organizations in the Tropical Storm Nicholas disaster area, which includes all of Louisiana.
It is an advisable practice to keep thorough records for the dates when your business may have been inoperable during declared disasters. Documentation of payroll during the applicable time frame is especially important. If the ERTC is allowed for Ida and Nicholas, payroll records will be necessary to calculate the tax credit due to the business.
Business Interruption Insurance and Taxes
Business interruption insurance is used by businesses to recoup any income that would have been earned and taxed but was lost during an inoperable time. Because the insurance proceeds are a replacement for income earned from operations, it is generally considered taxable. Please note that every insurance policy is different and should be reviewed for tax considerations.
Business owners should be aware that business property losses not covered by insurance could be tax deductible. The business owner will need documentation of losses and how the losses were caused by the business disruption.
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