The coronavirus pandemic has had a major impact on the business world and the global economy. In our nation’s current situation, businesses and business owners are having to take steps to reassess the way they handle the financial aspect of their businesses, especially with 2020 business taxes due in a few short months.
Business finances could potentially take a major hit as a result of this pandemic, but there are many nuances to 2020 business taxes that, if understood correctly, could help avoid unnecessary headaches.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act has the potential to help you improve the state of your 2020 business taxes following the difficulties that the coronavirus pandemic has brought on. The CARES Act came about in March of this year and was designed to provide relief and financial help for companies and individuals.
Listed below are some potential effects of the CARES Act that you can either benefit from or need to keep an eye out for as a business owner.
Paycheck Protection Program (PPP) Loan
Small Business Administration (SBA) loans were designed to aid small businesses in maintaining employees during the pandemic, helping to reduce layoffs and lessen the pandemic’s economic impact. The loan was intended to be put toward payroll and operating costs. Applications for PPP loans closed on August 8, 2020.
These loans have the potential to be forgiven, if they were used as the government intended, but applications for partial and full forgiveness might not be processed by the time tax season starts. Whether or not the loan is forgiven will affect a company’s accounting, so delays in forgiveness notifications could make it difficult to wrap up the 2020 taxes for some businesses.
PPP Flexibility Act
Amendments were made to the PPP on June 5, 2020. Loans granted after this date carry a maturity period of five years; originally, the SBA had set a two-year term to PPP loans. Modifications were made to extend the covered period for loan forgiveness, too: 24 weeks after the loan is received or December 31, 2020, whichever comes first.
The amendments updated the amount of the loan that small businesses could spend on non-payroll costs and still be eligible for partial loan forgiveness. They also extended the timeline for businesses to qualify for FTE and Salary/Hourly Wage reduction safe harbors from June 30, 2020 to December 31, 2020, contingent on the business fully restoring FTEs and/or salary/hourly wages. A new FTE Reduction Exemption was made to provide loan forgiveness will not be affected if FTE reduction was a result of not being able to rehire employees or go back to pre-pandemic business conditions.
Economic Injury Disaster Loans (EIDL)
Similar to PPP loans, EIDL are SBA loans that can be used to support businesses negatively affected by COVID-19 and are beneficial to those who are self employed and who do not have employees. Keep in mind that funds from both programs cannot be used for the same purpose. EIDL have to be repaid in full and has different terms than PPP Loans.
Businesses who applied for EIDL received up to $10,000 in advance, a sum of money separate from the loan and technically considered to be a grant. Because the EIDL advance isn’t a part of the loan that needs to be repaid, it won’t be treated as a loan on your financial statements and tax return.
The IRS has issued recent Notice that this advance will be considered taxable income and will not change unless Congress passes legislation to alter it. This forgiveness amount should be included with 2020 taxes as Other income, to offset 2020 PPP-related expenses, if the loan “can be reasonably expected” to be forgiven.
While EIDL and PPP loans aren’t necessarily taxable, expenses paid for by the loans cannot be included as tax deductions. So, while you won’t have to pay taxes on the SBA loans, you miss out on otherwise deductible expenses that you will have to pay taxes for. Keep in mind that this is what has been directed by the IRS in recent Notice’s; future Congressional amendments to these current guidelines could change how this forgiveness money is taxed.
Employee Retention Credit (ERC)
If a business did not get an SBA loan, they might qualify for an ERC. An ERC is a refundable tax credit equal to 50% of up to $10,000 of qualified wages per eligible employee paid after March 12, 2020, through Dec. 31.
Eligible employers include entities with any number of employees who have been affected by COVID-19 in one of two ways.
- Operations were partially or completely stopped in accordance with a government order.
- More than a 50% reduction in gross income for a calendar quarter when compared to the same quarter of the previous year.
There are plenty of things to consider when looking at how your business accounting might be impacted for the upcoming 2021 tax season, and you would be wise to begin planning now.
2020 taxes are more complicated with PPP, CARES Act and your growing profits. Contact Insogna CPA today for helping minimize your taxes as much as legally possible.