7 minute read—Beginner|I Know Things|Expert CPA
Learn about pandemic tax-law changes that could affect your 2020 taxes.
PPP and Employee Retention Tax Credit
The Treasury Department ruled that deductions couldn’t be taken for expenses tied to PPP loans, but Congress overturned this decision in December 2020. On federal income tax returns, businesses can take advantage of deductions as if it were any other year, regardless of how they used their PPP. State income taxes will vary by state.
Businesses that received these forgivable, low-interest loans to keep their employees on payroll cannot use the employee retention tax credit for the same expenses as their PPP loan.
The employee retention tax credit was designed to subsidize employee wages. For businesses, it accounts for 50% of wages paid from March 13, 2020 through the end of the year and 70% of wages paid from the beginning of 2021 through June 2021. Amounts are capped at $5,000 per employee in 2020 and $14,000 in 2021.
Net Operating Losses
A tax law was put into effect in 2017 that prohibited businesses from deducting current losses from past profits and limited how businesses deducted losses against current profits. A change was made in 2020 to assist businesses affected by the pandemic, allowing them to get money now that would’ve come later as they earned profits. Business owners can carry losses back for up to five year to offset past profits. Tax years 2018, 2019, and 2020 are eligible for this.
Additionally, in 2020 Congress revoked the limit on how much taxpayers can use their business losses to offset non-business income. The previously set limits of $250,000 for individuals and $500,000 for married couples don’t apply to 2018, 2019, 2020. This temporary change will greatly benefit those who own businesses that showed losses but have sizable profits.
Payroll Tax Deferrals
To try and provide businesses with a bit of temporary financial relief, employers were relieved of having to pay their half of Social Security payroll taxes in 2020. These taxes must still be paid in two installments: half by the end of 2021 and the other half by the end of 2022. This deferral is not the payroll tax deferral that President Trump authorized by executive action. The president’s action allowed employees to put off paying their portion of the Social Security tax. Taxes deferred by individuals during the end of 2020 must be paid back during 2021. (Note: We do not recommend this strategy as payroll tax liability falls on the business owner to pay or face severe IRS persecution)
This is our favorite change…The tax deduction for business meals was broadened by Congress in an effort to support the restaurant industry despite the damaging effects of the pandemic. Instead of being 50% deductible like in the past, business meals will be 100% deductible in 2021 and 2022. This includes both local and travel meals 100% deductible for the next two years. Meals consumed in-restaurant, delivery, and takeout are covered.
Miscellaneous Tax Breaks
In addition to the changes mentioned above, Congress issued a number of others that were set to expire at the end of 2020. Some of these temporary tax breaks can be widely applied while others have limited applications. The more common tax breaks include the deduction for energy-efficient commercial buildings, lower excise taxes on alcohol, and the work opportunity tax credit that provides an incentive for hiring people from disadvantaged groups.
Less common breaks include a tax credit for maintenance of short-line railroads, accelerated depreciation for racehorses, a credit for two-wheeled plug-in vehicles, and expensing rules for film, television and theater productions.
To ensure that your business doesn’t miss out on any of these pandemic tax-law changes, contact Insogna CPA to enlist the help of an integrated team of CPAs.