The Cares Act, the PPP program, and other federal programs designed to help small businesses get through the COVID-19 pandemic present many new tax concerns for small businesses. If you are a small business owner, trying to keep up with all these changes can be challenging. Luckily, you don’t have to. We’ve summarized the essential parts that can affect how small businesses will file their 2020 taxes.
Here is what you need to know so far:
The New Coronavirus Programs and Laws That Could Impact Your Taxes
The following are the significant pieces of new stimulus legislation that you need to be familiar with:
The Families First Coronavirus Response Act (FFCRA) The FFCRA has several provisions, including a requirement for employers to provide paid sick leave, and new paid family and medical leave. Importantly, it also has a provision for new tax credits for the paid leave.
Coronavirus Aid, Relief, and Economic Security (CARES) Act The CARES Act passed in March 2020 provided several tax breaks and tax changes that you need to be familiar with.
Paycheck Protection Program (PPP) The PPP emergency loan is an integral part of the CARES act. The program distributes more than $600 billion in forgivable loans for small businesses. The catch is businesses have to spend at least 60% on employee payroll costs. The other 40% of funds can be used for mortgage interest, rent, and utility payments. Notably, the forgiven PPP loans are tax-exempt, but there are still other considerations to worry about.
PPP Flexibility Act This act was passed in June 2020, and its main goal was to make changes that ease the process for businesses to get the forgiven loan. In terms of tax changes, this act allowed employers with a forgiven PPP loan to benefit from the CARES act’s tax deferrals.
Economic Injury Disaster Loan (EIDL) program changes Although this program existed before coronavirus, congress and SBA typically made changes to provide more loans and cash advances to small businesses. Some of these funds are taxable.
How Does This Affect 2020 Taxes?
Now that you understand the primary stimulus legislation of 2020, let’s look at the CARES Act’s tax credits and tax changes intended to provide short-term relief to businesses suffering from COVID-19:
Employment retention tax credit: If your business did not take out a Paycheck Protection Program (PPP) loan, you might be eligible for the new employee retention tax credit that provides up to $10,000 per employee. The tax credit, which is worth 50 percent of qualifying wages, applies to all wages from March 13, 2020 to January 1, 2021.
Delay of federal payroll tax payments: If you are a self-employed entity, you can delay the employer portion of federal payroll tax payments. The payments that include the Social Security tax owed for 2020 may be deferred over two years. You are required to pay 50 percent by the end of 2021 and the remaining portion by the end of 2022.
Net Operating Losses (NOLs) limitations: If you are a business with net operating losses, you can benefit from relaxed limitations. Firms with an NOL in tax years 2018, 2019, or 2020 can have their NOL carried back five years.
Alternative minimum tax (AMT) credits: Uou can immediately claim a refund if your business was due to receive corporate alternative minimum tax (AMT) credits at the end of 2021.
Increase of business interest expense deductions: You can now increase your business interest expense deductions on your tax returns. For 2019 and 2020, the amount of interest expense that you are allowed to deduct on your tax returns has been increased to 50 percent from 30 percent of your taxable income.
What about the New American Rescue Plan of March 11, 2021?
On March 11, 2021, President Joe Biden signed the American Rescue Plan Act (ARPA) of 2021. The act extended the 2020 enacted COVID-19 stimulus package provisions and measures. Two provisions from the ACT could have implications on your taxes:
- A provision that exempts the first $10,200 of unemployment compensation from income tax for small businesses and individuals that earned not more than $150,000 in 2020, meaning that the first $10,200 that you earned won’t be taxed
- A reduction in the amount small businesses and individuals pay for their insurance under the Affordable Care Act, which may likely result in a change in the premium tax credit, which will eventually affect your 2020 tax return.
What are the new filing deadlines for small business taxes?
Once again, the IRS moved the income tax filing taxes to give small business owners more time to complete and submit their tax returns. Businesses and individuals who usually file their tax returns by April 15 have until May 17 to file their 2020 taxes as per the the American Rescue Plan, signed into law on March 11, 2021, that impacts 2020 tax returns.
If you’ve already filed your taxes for 2020 and want to understand any implications from the American Rescue Plan, make sure to talk with your business and accounting advisors.