The Biggest Business Tax Impacts of COVID-19

The government responded to the pandemic with assistance programs, many of which impact taxes for businesses. Here is an overview of some of the major changes.

Key takeaways:

• The COVID-19 pandemic introduced major tax overhauls and assistance programs, including the Child Tax Credit, the Paycheck Protection Program, crisis recovery loans, and employer tax credits.
• After any crisis, tax policy is reevaluated, and the continuing pandemic could mean more changes are coming.

Since early 2020, the government has rolled out numerous tax changes to help support Americans during tough economic times. It’s estimated that hundreds of thousands of US businesses had to close because of COVID-19, and we’re still feeling the impacts of economic uncertainty as the pandemic continues into 2022.

Let’s walk through the biggest tax revisions that came about because of COVID-19 for individuals and businesses and how economic volatility may cause a reevaluation of tax policy.

The Child Tax Credit

The American Rescue Plan (ARP) expanded the Child Tax Credit, increasing it to a maximum of $2,000 to $3,600 for children five and under and $3,000 for children ages six to 17. It is now available to households with little or no income and is fully refundable under the ARP. Families can now receive up to half of their credit in advance in the last half of 2021.

Families can take the maximum credit if they have a modified adjusted gross income of $75,000 or less for single filers, $112,500 or less for heads of household, and $150,000 or less for joint filers and widows or widowers who qualify. The maximum amount of the credit is reduced by $50 for every $1,000 over the income thresholds.

The ARP created the largest Child Tax Credit ever available to provide families financial help during the pandemic. Right now, these changes only apply to 2021, but the current administration has expressed interest in extending them into 2022.

The Payment Protection Program

The Payment Protection Program (PPP) was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. This program provided loan assistance to small businesses to encourage them to keep employees on the payroll. Funds could be used to cover payroll costs in addition to some operational expenses related to COVID-19.

The first-draw PPP loans were provided in 2020, and they could cover up to 2.5 times monthly payroll expenses with a maximum of $10 million. Second-draw loans have a maximum of $2 million. Loan funds are fully forgivable as long as a business uses the money for qualifying expenses.

In 2021, the ARP added $7.25 billion to the PPP, and that round of the program ended on May 31, 2021. However, current borrowers can still apply for loan forgiveness.

According to the Small Business Administration (SBA), there have been 11,453,936 PPP loans distributed and 9,087,832 forgiveness applications in 2020 and 2021. The program has paid out a total of $791,420,024,727. Millions of businesses have been able to stay afloat because of the PPP, but it is not clear if there will be any additional relief approved for the program in the future.

Business expenses that qualified businesses for PPP loan forgiveness are tax-deductible, and forgiven PPP loans aren’t considered taxable income. Eligible employers can also defer payroll taxes, even after loan forgiveness, but half of those deferred taxes from 2020 have to be paid by the end of 2021, and the other half by the end of 2022.

Economic Injury Disaster Loans

The SBA also started providing Economic Injury Disaster Loans (EIDL) in response to the pandemic. These funds must be repaid but are low interest, fixed-rate 30-year loans. Funds can be used for operating expenses or to repay debt.

The max EIDL amount is $2 million, and payments are deferred for the first two years, though interest still accrues. Eligible businesses could apply for a loan until December 31, 2021.

The SBA reports that $308,540,747,105 in EIDL dollars and over 3.8 million applications have been approved.

This loan is not considered taxable income, so businesses don’t have to worry about a significant tax impact. They can typically also deduct loan interest on their taxes. 

Family and sick leave tax credits

COVID-19 also spurred additional tax credits for employers granting family and sick leave. If an employee can’t work because they’re ill with the coronavirus, they are entitled to 10 days of paid sick leave at their regular pay rate. Employees can also care for someone who gets sick or a child because of a school closure—up to two weeks at two-thirds their regular pay rate. The IRS says that up to 10 weeks of qualifying paid leave can be counted towards the family leave credit.

Eligible employers can receive a credit in the amount of the sick and family leave provided, in addition to any health insurance plan expenses and the employer’s Medicare share on the leave. Organizations could originally take a credit for the period of April 1, 2020, to December 31, 2020, and the credit is refundable and applied to employment taxes. Employers can request an advance of these credits as well.

The ARP then allowed eligible employers to take these credits for sick and family leave from April 1, 2021 through September 30, 2021.

Looking to the future

The government provided many tax breaks and incentives to help businesses and individuals during COVID-19. Some provisions have expired, but many have allowed people to stay afloat. Tax policy is often reevaluated in any global or financial crisis as priorities shift to meet the moment. 

The IRS experienced significant delays because of the pandemic, and deadlines were pushed back to help people prepare. It is unclear if those trends will continue into 2022 or whether some of these game-changing provisions will be extended with additional government relief packages.

As the Organization for Economic Co-operation and Development (OECD) states in a report, “The COVID-19 crisis has caused a significant deterioration in public finances, which calls for a rethink of tax and spending policies once the recovery is well underway.” The pandemic revealed many economic problems for countries around the globe, and many of those issues could be dealt with in new ways. 

Further, a Brookings Institution article states that the pandemic is an opportunity to renew the “social contract” and may mean that citizens will become more willing to pay taxes to improve government assistance. However, whether this conclusion or economic volatility will spur broader changes to the tax code in a fiercely divided Congress remains uncertain.

Questions about taxes during COVID-19?

Tax law changes frequently, and it’s not easy to know what tax breaks you qualify for and if you have to follow new requirements as a business owner. The Provident CPA and Business Advisors team is here to help. Reach out to us today to get assistance with tax minimization or business planning strategies.