As if 2020 wasn't challenging enough for a business owner, now it's time to think about tax filing, which is shaping up to be more complicated than usual. Though the CARES Act and Paycheck Paycheck Protect Program were created to help small businesses, remember there is "no such thing as a free lunch." Business owners need to sit down, gather their documents, and understand what can and can't be deducted due to the changes made in 2020. While we are not tax accountants, we do encourage you to speak with someone who is right away so you can get some insights into the specific effect on you and your business.
Here are a few questions to get you started.
If I received a PPP loan How will it impact my taxes?
PPP loans were attractive because they were forgivable if your business used them for the intended purposes. Typically, under tax law, when a debt is forgiven, it becomes taxable income. However, under the PPP, loan forgiveness is tax-exempt, which means it's not taxable income. The IRS has stated that the expenses paid for with the forgiven loan proceeds would not be deductible expenses for tax purposes. The COVID-Related Tax Relief Act that was passed in December 2020 has overridden the IRS's interpretation. Thus, the expenses are fully deductible even if the loan is forgiven. Again, talk to your tax advisor to ensure this is applicable to your business.
I deferred my payroll taxes. When are they due?
As part of the CARES Act, business owners struggling with making payroll were given the ability to defer the employer's portion of their employees' Social Security payroll taxes. The deferral applied to the 6.2% Social Security tax on wages paid from March 27, 2020, until the end of the year. If you are one of the many organizations that chose to take advantage of the deferral, you will need to pay the first half of what is owed by December 31, 2021, with the balance due paid by December 31, 2022.
How does the CARES Act impact how net operating losses are handled?
In 2017, the Tax Cuts and Job Act eliminated the net operating loss carrybacks for many companies, but under the CARES Act, NOL carrybacks are allowed for 2018, 2019, and 2020 in the form of a five-year carryback. That means for the last three tax years, you can carry back losses five years, and any unused NOL is carried forward until it is used up. You can also elect to forgo the carryback and bear the losses ahead, whichever provides your business's best outcome. The CARES Act also suspended the rule that taxable income of the carryback or carryforward year can only be reduced by 80% of the NOL. This suspension only applies to NOLs originating in 2018, 2019, and 2020.
I have employees working remotely in different states. How will that affect my taxes?
One of the most significant tax headaches introduced by the pandemic has been having employees working in different states. Though these temporary changes will not impact most cases, you must ask your accountant about your specific situation, as some states have introduced new tax regulations to recoup some of their tax losses.
Additionally, suppose your business is like many others, and you are considering making remote work permanent. In that case, any employees living and working in other states may put you in the position of having to pay those states’ business taxes and withhold state income tax on the employees’ wages.
Understanding the full impact of 2020 may take a long time, but business owners need to address the challenge of preparing their taxes for right now. Start speaking with your tax advisor as early as possible so that you have plenty of time to come up with a workable strategy.