The year 2020 packed quite a wallop for business owners around the country and the world. Not wanting to lay off trusted employees, many businesses struggled to keep up with payroll, many were forced to close their doors during quarantine, and sadly, some were forced to close their doors permanently.
Loads of government programs quickly appeared to help business owners hang in there through the brunt of the pandemic. Now that 2020 is nothing more than a ghastly vision in our rearview mirror, business owners are left to sort out the pieces of this government assistance as they prepare their business taxes. Without a business accountant or the right guidance, preparing your taxes can be terrifying.
Don’t stress (more). We are here to help you understand the programs you may have received and what your tax obligations and deductions are for 2020. Let’s take a look at seven of the most common situations that may apply.
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1) Business Interest Expense Deduction
The allowable business interest expense deduction has been increased for 2020, due to the CARES Act. For many business entities, including some sole proprietorships, the expense deduction has been increased from 30% to 50% of adjusted taxable income.
2) Paycheck Protection Program (PPP)
In addition to increasing the business interest expense dedication, the CARES Act also introduced PPP or the Paycheck Protection Program, an emergency loan program that allocated billions of dollars in loans to small businesses. These loans funded payroll, rent/mortgage, utility payments, and other expenses, some of which were considered forgivable and do not need to be paid back.
When it comes to your taxes, the money that was used for forgivable expenses like payroll, rent/mortgage, and some utilities, is not considered taxable (nor can it be a deductible business expense). However, any funds that were not forgiven are considered taxable income.
Please note that this forgiveness is not automatic and you must apply to have these loans forgiven. Applications need to be submitted at the end of the loan period, up to 24 weeks from the loan’s start.
3) Payroll Tax Deferrals
The CARES Act allows businesses to defer payment and deposit of their portion of 2020 Social Security taxes. If you take advantage of this option, half of these taxes are due and payable on or before December 31, 2021, and the second half is due on or before December 31, 2022.
4) Economic Injury Disaster Loan (EIDL)
Businesses impacted by the mandatory shutdowns and the economic slowdown were able to apply for loans and cash advances through The Small Business Administration’s EIDL or Economic Injury Disaster Loan Program. These loans are not tax-exempt and all funds received are considered taxable income.
However, employers had the option to take a $10,000 advance on this loan (before it was approved) which was then converted into a forgivable grant. This grant does not need to be repaid (even if your loan was ultimately denied), however, it is currently considered taxable income.
5) Employee Retention Tax Credit
In order to keep their staff members during this challenging time, the Employee Retention Tax Credit (ERTC) was created. An organization could have qualified for this in two ways:
- They were fully or partially closed due to a government-mandated shutdown or
- Their gross receipts declined more than 50% for any quarter as compared with the same quarter in 2019
This entitles employers to receive a tax credit for 50% of qualifying wages paid from March 13, 2020, through January 1, 2021, up to $100,000 per employee.
6) Families First Coronavirus Response Act (FFCRA)
“Toughing it out” and going to work sick is not an option during a pandemic, which has forced many employees to take sick leave for themselves or family leave to care for family members who may be ill or unable to go to school due to closures.
The FFCRA required businesses to offer this paid leave to employees and is now offering tax credits to businesses who made these payments.
- Sick Leave Pay included up to 2 weeks (80 hours) at a minimum of 2/3 the employee’s regular salary. This payment started at $200 and maxed out at $2,000.
- Family Leave Pay included up to 10 weeks at a minimum of 2/3 of the employee’s regular salary. This payment started at $200 and maxed out at $10,000.
If your business made any of these payments under the FFCRA, you can claim a tax credit of 100% of the cost of any sick and family leave salaries, as well as qualified healthcare plan expenses and your share of FICA taxes for any sick leave expense.
7) Small Business Healthcare Tax Credit
If your business has less than 25 employees whose average salary is $50,000 per year or less, and you purchased health coverage through the Small Business Health Options Program (SHOP) plan for ACA coverage, the Small Business Healthcare Tax Credit offers up to 50% in credits for the costs paid for premiums purchased.
Need Help Navigating Your Business’s Tax Obligations? We’ve Got You Covered
We hope this was able to provide some clarity. The new tax laws may seem daunting, but they don’t have to be when you have the right tax advisor. Our tax preparation services can walk you through your taxes, every step of the way, so you can get back to business. Contact us today and feel the anxiety melt away.