Typically, taxes are a significant expense for most businesses. But 2020 isn’t a typical year, and the tax rules for this year provide opportunities to turn the tables on the government and get money back. Congress and the IRS have created new tax breaks to help small businesses deal with the economic fallout of COVID-19. Here are some key tax rule changes that may affect your business and you as the business owner.
If you receive a Paycheck Protection Program (PPP) loan designed to help you keep or bring back employees onto your payroll as well as cover certain other costs, your debt can be forgiven up to set limits. Typically, the cancellation of debt triggers taxable income. But under a special rule for PPP loan forgiveness, it’s tax free.
If you received an Economic Impact Payment, it too is tax free. It does not have to be reported on your personal 2020 federal income tax return. Tax-free treatment is not conditioned on what you do with the money.
Usually, you must deposit employment taxes—income tax withheld from paychecks plus the employer and employee share of Social Security and Medicare (FICA) taxes—on workers’ taxable compensation according to a set schedule. If you don’t, you can be penalized. However, under a new rule, you can elect to defer the employer share of Social Security taxes from March 27, 2020, through the end of the year.
If you make the election, then 50% of the deferred amount is payable by the end of 2021 and the other 50% is payable by the end of 2022. However, if you received a PPP loan, you must stop deferral once the loan is forgiven.
Due to several law changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you may be able to file amended returns for 2018 (and/or 2019 if you already filed this return) to obtain a tax refund. Here are some of the sources for refund opportunities (these law changes apply for 2020 as well):
- Net operating losses. If you suffered a net operating loss in 2018 (or 2019), you can carry back the loss for 5 years to offset all the taxable income in those years. The result is an immediate tax refund. The IRS has provided procedures to expedite these refund claims.
- Interest expense limitation. Businesses that don’t qualify under a small business exemption based on the amount of average annual gross receipts (as well as larger farming and real estate businesses that didn’t elect exemption) are subject to a special limit on the amount of interest paid that can be deducted. The CARES Act liberalizes the rule to allow for a greater deduction, again permitting amended returns that may produce tax refunds.
- Qualified improvement property. If you made certain improvements to the interior of commercial space, such as a restaurant or retail store, you can now treat the costs as fully deductible using bonus depreciation in the year in which you placed the property in service. Previously, such costs had to be depreciated over 39 years. Again, the IRS has provided procedures to make this change in accounting method and obtain tax refunds.
New tax credits
Tax credits are even better than tax deductions because they are a 100% offset against taxes. Typically, tax credits offset income taxes. But new credits offset certain employment taxes.
- Employee retention credit. A qualified small business that pays qualified wages (amounts up to $10,000 per employee, plus health insurance coverage) after March 12, 2020, and before January 1, 2021, can take a 50% credit. The credit is refundable, so it can be recouped even if it’s more than taxes owed. A qualified small business is one where the business is partially or fully suspended because of COVID-19 or has gross receipts below 50% of the comparable quarter in 2019. The credit is an offset to all employment tax deposits and is figured on a quarterly basis (starting with the second quarter of 2020). If employment taxes are not sufficient to cover the credit, the employer can receive an advance payment from the IRS. There’s a new tax form to obtain the advance payment of employer credits.
- Paid sick leave. Small businesses required by the Families First Coronavirus Response Act (FFCRA) to provide certain paid sick leave to employees up to 80 hours can take a fully refundable tax credit to offset the required payments (up to a set dollar amount). An advance payment similar to the treatment for the employee retention credit applies here.
- Paid family leave. Small businesses required by FFCRA to pay up to 10 weeks of family leave related to COVID-19 can also take a fully refundable tax credit. Again, an advance payment similar to the treatment for the employee retention credit applies here.
You can’t use the employee retention credit for the same wages subject to the paid leave credits.
All of the rules are highly confusing. And state and local level tax rules for small business may differ from the federal rules discussed above. It’s advisable to work with a CPA or other tax professional to be sure you make the right choices of which tax breaks to use and take advantage of all of the ones to which you are entitled.
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