For many, owning a small business in 2020 incited a flurry of activity and emergency measures just to stay afloat during the pandemic. Immediate solutions to offset the disruptive effects of COVID-19, such as the Paycheck Protection Program, provided much-needed relief, but will also result in the 2020 tax season being unlike any we have experienced. During last year’s tax season, a higher-than-normal number of small business owners working from home opted to prepare their own tax returns. Now, facing the complexities of the past fiscal year, they are electing to retain the services of tax professionals with the expertise to navigate the changes in reporting.
The CARES (Coronavirus Aid, Relief and Economic Security) Act provided direct economic assistance for small businesses, but there are specific consequences you need to know that will affect filing taxes this year. In this article, we’ll explore the tax implications of this assistance for a better understanding of how to prepare for this year’s tax season.
Paycheck Protection Program (PPP)
Businesses with 500 or fewer employees that were in operation on Feb 15, 2020, are eligible for the loan. If you spend at least 60% of the total amount in payroll within a covered period between 8 to 24 weeks you can even receive loan forgiveness.
- The non-payroll expenses eligible for PPP loan forgiveness are rent, covered mortgage interest, utilities, employee health equipment, supplier cost, property damage, and business expenditure.
- The PPP loan amount used in business expenses is now tax-deductible.
- After the recent update in the Consolidated Appropriations Act, 2021, businesses can take advantage of both the PPP loans and the ERTC.
Employee Retention Tax Credit (ERTC)
The CARES Act defines the ERTC at 70% of the eligible wages paid to employees. For each employee, it is capped out at $5,000 for 2020 and $14,000 for the first two quarters of 2021. You can qualify for ERTC if:
- Your business was fully or partially closed due to the government-mandated COVID-19 lockdown order.
- Your employee wage is paid between March 13, 2020, to June 31, 2021.
- Your business gross receipt saw a reduction of 50% in 2020 in comparison to the same quarter in 2019 or a reduction of 20% in 2021 in comparison to the same quarter in 2019.
However, keep in mind that you cannot claim ERTC on wages paid with the PPP loan funds. In terms of Social Security tax, you have the option to defer it till the end of the year.
State Tax Changes for Small Business
The requirement to pay taxes on a state or local level depends on whether the state has adopted the federal tax provisions set by the CARES Act. New Jersey is an example of a state that determines its own rules. Others follow the federal code on a static or rolling basis.
- Static conformity — the state adopts the changes to the tax code as of a specific date.
- Rolling conformity — the state adheres to the code changes as they occur.
What this means for your small business taxes is that there may be a difference in how your income is determined on your federal return versus your state return.
Navigating the Complexities of the Tax Changes
The tax implications of various provisions of the CARES Act are complex and vary according to the specific circumstances of each business.
Small businesses are dealing with ground-breaking precedents such as the question of employees working from home creating a nexus. For example, a business located outside the state of Maryland with employees temporarily working from home in Georgia will not fall under Maryland income for withholding tax purposes. Conversely, for a business located outside Maryland with employees temporarily working in Maryland, it will be considered as doing business in Maryland.
The best course of action for a small business this year is to speak to a tax advisor with thorough knowledge about how the various aspects of the CARES Act work with each other and with the rest of the tax code.
Prepare to Meet with Your Tax Professional
The IRS has issued a lot of guidance this year and taxpayers are exempt from none of it. Here are some pointers for preparing for your meeting with your tax advisor.
- Maintain accurate bookkeeping.
- Document your use of any PPP funding
- Be aware of the changes that will affect your tax return.
- Compile a comprehensive list of the details about your business and how you conduct business.
At BradyRenner CPAs, our response to the new tax climate for small businesses is to meet the requirements for each of our clients with efficiency and accuracy. Regardless of the nature of your operations and the variables in your status under the CARES Act, we have solutions. Contact us today to talk with us about how we can help you this tax season.
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