As if 2020 wasn’t challenging enough, this season’s tax-filing is going to be even more complicated than usual. Though the CARES Act and the Paycheck Protection Program were put into place to help small businesses, the old adage about “no such thing as a free lunch” is proving true once again as business owners sit down to gather their documents and realize just how big an impact the changes will make on what they can and can’t deduct, on payroll tax, and many other elements of their filing. We encourage you to speak with our office as soon as possible so that you can get some insights into the specific effect on you and your business. Start by asking these questions and go from there.
1. I took a Paycheck Protection Program loan. How will it impact my taxes?
The PPP loans were attractive because they were forgivable if used for the intended purposes. Normally, under tax law, when debt is forgiven it becomes taxable income. However, by law the PPP loan forgiveness is also tax exempt, which means it is not taxable income. The IRS had taken the position that the business expenses paid for with the forgiven loan proceeds would not be deductible expenses for tax purposes. The passage of the COVID-Related Tax Relief Act in December 2020 has overridden the IRS’s interpretation in Rev Ruling 2020-27. Thus, the expenses are fully deductible even though the loan is forgiven. CAUTION: This may not be true for state tax purposes.
2. I deferred my payroll taxes. When are they due?
As part of the CARES Act, employers struggling with making payroll were offered a life raft in the form of a deferral of the employer’s portion of their employees’ Social Security payroll taxes. The deferral applied to the 6.2% Social Security tax on wages paid for the period from March 27, 2020 to the end of the year. If you are one of the many businesses that chose to take advantage of the deferral, you will need to pay the first half of what’s owed by December 31, 2021 with the balance due one year later on December 31, 2022.
3. How does the CARES Act impact how net operating losses are handled?
Back in 2017, the Tax Cuts and Jobs Act eliminated the net operating loss (NOL) carrybacks for most businesses, but under the CARES Act, NOL carrybacks are allowed for tax years 2018, 2019 and 2020 in the form of a five-year carryback That means that for each of the last three tax years you can carryback losses five years and any unused NOL is then carried forward until used up. You can also elect to forgo the carryback and carry the losses forward, whichever provides the best outcome for your business. The CARES Act also suspended the rule that the taxable income of the carryback or carryforward year can only be reduced by 80% as a result of the NOL. That suspension only applies to NOLs originating in 2018, 2019 and 2020.
4. I had employees working remotely in different states. Will that affect my taxes?
One of the biggest tax headaches introduced by the pandemic has been the effect of having employees working in different states. Though in most cases these temporary changes will not have an impact, it is important that you ask your accountant about your specific situation, as some states have introduced new tax regulations in order to recoup some of their tax losses.
Additionally, if your business is like many others and you are considering making remote work permanent, then any employees living and working in other states may put you in the position of having to pay those states’ business taxes as well as withhold state income tax on the employees’ wages. Understanding the full impact of this past year may take a long time, but for right now, business owners need to address the challenge of preparing their taxes.