The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided many tax provisions intended to help small businesses make it through the pandemic. A couple of key small business tax deductions are still opportunities this year, and planning now could save you time and money next tax season. If you took advantage of tax payment deferrals, it’s also time to prepare for paying those amounts due.
Meals and Entertainment Deduction
The tax deduction for business meals and entertainment expenses is currently valid through the end of 2022, allowing businesses to deduct 100% of the cost of qualified business meals. Note that meals must be provided by a restaurant in order to be 100% deductible. You can also include the costs associated with purchases made from restaurants, including tax, delivery fees, and tips. The special treatment of restaurant meals is intended to support the restaurant industry’s comeback.
The 50% deduction continues to apply for business meals outside of restaurants, including food purchased from grocery and convenience stores, vending machines, and any eating facility located on the business premises. Snacks in the office also fall under the 50% category.
If you are entertaining clients, the costs for the food and beverages must be stated separately on the bills, invoices, or receipts. If the entertainment and meals are purchased together and the costs are not reasonably allocated on the invoice, the expense is not deductible.
Net Operating Loss (NOL) Deduction
Another significant small business tax deduction in the CARES Act was the temporary loosening of restrictions for the NOL deduction. Prior to the CARES Act, the Tax Cuts and Jobs Act in 2017 restricted the amount that could be deducted, as well as the carryback period. The CARES Act temporarily reinstated the five-year carryback period for all NOLs generated after Dec. 31, 2017, and before Jan. 1, 2021. In effect, businesses can claim current losses against past profits, opening the potential for a tax refund.
Deferred payroll and self-employment taxes coming due
The CARES Act temporarily allowed employers to defer deposits and payments of the employer’s share of Social Security taxes, while self-employed individuals were also able to defer payments of certain self-employment taxes. This temporary deferral ended December 31, 2020, with no extension for the 2021 tax year. If you took advantage of the temporary deferral of employment taxes, remember to resume those payments in order to avoid even more costly penalties and interest.
The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates:
- On December 31, 2021, 50% of the eligible deferred amount; and
- On December 31, 2022, the remaining amount.
If an employer pays any amount before the applicable dates, any payments made are first applied to reduce the employer’s liability for an amount due on December 31, 2021, and then to the amount due on December 31, 2022.
If you need assistance determining the best way to account for business losses, or how to resume payments of deferred taxes, contact one of our tax experts. We can also help you take advantage of small business tax deductions. Planning now can save time and reduce your tax burden at the end of the year.