Tax Newsletter September 2020: Tax Credits that Can Make an Impact in 2020

By Ron Marshall, CPA and Matt Hisey, CPA

2020 has been a record-breaker of a year, and not in the way we had anticipated. When the year first began, the U.S. economy was booming. Unemployment had fallen to a rate we hadn’t seen in decades, and businesses were looking ahead to a sunny future. But COVID-19 threw us for a loop. When the coronavirus made it to our shores, our leaders were forced to reexamine business trajectories, and most had to make a series of uncomfortable (and unpopular) decisions. Simply surviving became the name of the game.

The coronavirus pandemic is alive and well, but the dust has settled enough for us to take a breath and look at our condition with fresh eyes. 2020 doesn’t have to end on a low note. While there are some things we cannot control, there is a lot that we can, and we owe it to ourselves to take advantage of the opportunities we have at our disposal. Below are three tax credits worth considering this year. Take a look and see which ones can give you a boost until your business can fully recover from the COVID-19 pandemic, and when you’re done, learn about a dozen others by downloading our helpful credit whitepaper here.

Employee Retention Tax Credit
The Employee Retention Tax Credit was one of the provisions written into the Coronavirus Aid, Relief, and Economic Security (CARES) Act that encourages businesses to keep workers on their payroll. The credit is for up to 50% of wages that are paid to keep workers employed when the organization experiences coronavirus-related disruptions.

The Employee Retention Tax Credit is a credit against payroll taxes, which allows businesses to reap the benefits almost immediately. The benefit is accumulated on up to $10,000 of wages per employee (including the costs of medical benefits), which means that the maximum benefit businesses can get from this credit is $5,000 per employee.

Research Tax Credit
The Credit for Increasing Research Activities, commonly called the Research and Development (R&D) Tax Credit, has been around for decades and was created to reward companies for investing in R&D. The credit is based on a company’s incremental increase in R&D spending.

Businesses don’t necessarily need to create new products or discover something groundbreaking to be eligible for the R&D Credit. Simply working to improve business processes or altering existing products can be enough. The credit is 20% of research expenses that exceed an amount from a benchmark year, or 14% if you use the simplified alternative credit. 100% of in-house expenses can be taken into account, but only 65% of contracted expenses can be considered.

Nothing has changed with the R&D Tax Credit for the 2020 tax year, but businesses should pay close 
attention to their credits if they elected to carry back net operating losses (NOLs) to prior years. The CARES Act included a provision that allows businesses to carry NOLs back to 2018 and 2019. In doing so, R&D Credits that were applied against taxable income in those years may get pushed forward and can be applied to current year or future tax liabilities.

Credit for Paid Sick Leave and Credit for Paid Family Leave
Two tax credits were created by the Families First Coronavirus Response Act (FFCRA) to reward businesses for providing paid leave to their employees.

  1. The Paid Sick Leave Tax Credit refunds employers for providing up to 10 days of sick leave to employees affected by the coronavirus between April 1, 2020, and the end of the year. Sick leave can be awarded to employees who are – for example – self-quarantining, unable to work due to illness, or taking care of someone who is sick with COVID-19 symptoms. 100% of wages are eligible for the credit, up to a maximum of $5,110 per employee.
  2. The Paid Family Leave Tax Credit refunds employers for providing an additional 10 weeks of paid family and medical leave (FMLA) to employees that need to care for children because of coronavirus-related closures or health concerns. Only 2/3 of the employee’s regular pay is eligible for this credit, up to $200 per day, or $10,000 in total.

Both credits are taken against payroll taxes. They reduce the amount employers are required to deposit, allowing them to retain those funds and utilize them immediately. Credits that exceed payroll tax liabilities can be refunded.

2020 will almost certainly go down in history, but it doesn’t have to take us down with it. Tax credits and other tax-saving mechanisms can make all the difference to businesses surviving the ongoing COVID-19 disaster. To read about more tax credits that are available to you in 2020, download our 2020 Tax Credit Whitepaper here. If you have questions about any of these credits or would like to discuss your options with an M&J tax advisor, please contact us today.