When you think about natural disasters, the first things that come to mind are hurricanes, tornadoes, and earthquakes. When the pandemic plagued America, causing several businesses to shut down, many wondered, “Is COVID a natural disaster?”.
Because of the destruction the disease caused, the government deemed the coronavirus a natural disaster, and soon afterward, they enabled disaster relief programs to keep businesses afloat. These programs, such as the employee retention credit and the paycheck protection program, were implemented to help keep employees on the payroll.
At the same time, employers tried to make sense of the government orders. So how do these programs play into your business’s taxes? Continue reading below to learn more about these programs, covid tax status, and how you can properly account for them.
Is COVID a Natural Disaster?
Is COVID Considered a Natural Disaster for Taxes?
For those wondering, “Is COVID a natural disaster?” or, “is COVID a qualified disaster,” when it comes to taxes, the answer is yes.
This means that any taxpayer affected by COVID-19 in the United States may qualify for relief from some federal income tax filing and payment deadlines. Individuals who are unable to meet these deadlines due to the virus’ impact on them or their families may be eligible for penalty relief.
Specific COVID-19 relief and payroll credits are available in response to the pandemic. For example, there is the employee retention credit, also known as the ERTC.
Employee Retention Credit
Businesses that kept employees on their payroll during the pandemic were eligible for a retention credit against a portion of your social security tax.
Eligibility for the ERTC:
- Partial or complete suspension of business operations due to government order
- Your business had a reduction in gross receipts
Depending on how many full-time employees your business has, you are able to generate a credit based on their health plan and qualified wages, granted you are an eligible business. Through the recently passed IIJA bill, if you also received a loan from the Paycheck Protection Program, you could retroactively claim the ERTC credit on wages not forgivable through the PPP.
Common Misconceptions About COVID Taxes
There are several misconceptions and mistakes many business owners make when trying to account for these credits. For example, many believed that since their business was deemed essential, they did not qualify for these tax credits. In reality, companies, even those considered essential, still qualified if there was an impact or a change to their operations.
For instance, if the business was still open, but vendors or other supplies for the industry were not, that directly impacted the business. Therefore, you may still qualify.
My Business Was Not Shut Down
Even a partial shutdown of your business may qualify you for the available tax credits. As long as the shutdown, either partial or complete, was by a government agency, you could qualify.
Examples of eligible business shutdowns:
- Limited capacity inside your business
- Shutdowns of your vendors or suppliers
- Inability to access necessary work equipment
- Disruption to your business
- Reduction in services
- Reduction in service hours
When determining eligibility, the main question you need to answer is, “was my business unable to continue normal operations even after the government order? Did the government order negatively affect the business?”
If the government order negatively affected the business, you could qualify. Of course, this is only one part of the eligibility test. Your business must also have a decline in receipts for the eligible tax year.
Less than 50% Decline in Receipts
Many businesses assumed that since they did not meet the gross receipt requirements, they could not claim this credit. Fortunately, under the CAA (Consolidated Appropriations Act), the criteria changed from 50% to 20%.
My Business Grew During the Quarantine
Businesses that expanded during the quarantine or who did not have a significant decline in receipts typically did not qualify for the credit. However, you could still be eligible if your company had to shut down, reduce hours, or a partial shutdown at any point during the tax year. Certain expenses may qualify, so be sure to reach out to a tax professional for more information.
I Claimed the PPP
As mentioned earlier, those who claimed the disaster relief for COVID Paycheck Protection Program loan assumed they did not qualify for the credit. Due to the CAA, those who took the PPP could still claim ERTC credits for the wages not forgiven by the Paycheck Protection Program.
10 Quick Facts about “COVID Disaster Relief Tax Assistance”
- The COVID Disaster Relief Tax Assistance Act, passed in December 2020, provides federal tax credits to individuals and businesses affected by the pandemic.
- The credit amount is $300 for individuals making less than $75,000 a year or couples making up to $150,000 combined.
- The credit is also available for families with dependent children under the age of 17, with an additional $500 per qualifying dependent.
- Small businesses are eligible for up to 20% of their gross receipts from 2020 and 2021 as a tax credit.
- The act extends unemployment benefits through March 14th 2021, allowing unemployed individuals to receive an extra $300 in weekly benefits from the federal government.
- Businesses and nonprofits can apply for Paycheck Protection Program loans that provide forgivable loans if they continue to employ employees throughout 2021 or 2022.
- Payment relief programs provided by banks provide payment deferrals and loan modifications as options to help borrowers manage financial hardship due to the pandemic resulting in fewer delays and defaults on loans that would otherwise cause economic strain on borrowers and lenders alike.
- Taxpayers who qualify are able to request an additional refundable tax credit of up to 50% of their Social Security taxes paid in 2020 or 2021; this provision is designed to encourage employers not to reduce payrolls in order to collect these funds due to budget limitations caused by the pandemic’s disruption of the economy .
- Employers are required to pass along employee SUTA (state unemployment insurance) savings – reduced state fees – directly back into their workers’ paychecks after April 1st 2021 so that more money stays in workers hands during difficult times due crisis-related unemployment .
- Budget flexibility has been extended under newly signed provisions allowing companies more cash flow flexibility when it comes to paying employment taxes – deferring employer’s share of Social Security taxes through December 31st 2021 pending future action from Congress for a possible extension into 2022.
What is the status of COVID Disaster Relief Tax Assistance in the year 2023?
Help with COVID Tax Status and ERC
Suppose you are unsure of your company’s eligibility status with the ERC, or you need help deciphering the difference between PPP forgiven wages and ERC wages. In that case, there are companies you can reach out to.
For example, you can reach out to ERC Today for more information on how to retroactively claim the credits. They also have the resources needed to help you account for the ERTC.
Although you may be tempted to use online tax software to help make sense of these credits, you will find that your options are limited. It would be best for you to reach out to a specialist to handle the filing and accounting on your behalf.
COVID Disaster Relief Tax Assistance
Now that you know the answers to “is COVID a natural disaster?” and “does COVID count as a natural disaster for taxes?”, it’s time to see what tax relief options your business qualifies for. Many companies made inaccurate assumptions regarding their eligibility for the PPP and the ERC, but thankfully there are resources available to help clarify eligibility statuses.
There are also resources to help your business retroactively claim the credit. Contact us if you are ready to learn more about your ERC options or need help accounting for the credit.