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After Tumultuous 2020, Businesses Encouraged to Be Cautious in Tax Filings

  • The relief measures passed during the COVID-19 pandemic included tax credits, deferrals, and other options for small businesses
  • Untangling the various options can be a challenging process due to shifting guidance and certain limitations
  • Taking the time to consult with an accountant or business advisor on your 2020 taxes can help you receive the best benefits

If the shutdown orders, social distancing protocols, and other matters related to the COVID-19 pandemic weren’t challenging enough, small business owners enter 2021 facing another headache lingering from the previous year: the impact of the pandemic on their taxes.

Relief measures passed during the pandemic include certain forms of tax relief, such as credits and deferrals. However, the rules on this relief were modified during 2020, and claiming one option may eliminate eligibility for another.

Small business owners may be trying to juggle several crucial financial matters during the first months of the year. Applications for the new round of Paycheck Protection Program loans are due by March 31, a few weeks before the tax deadline. And some businesses may still need to complete a forgiveness application for a PPP loan received under the initial program.

Taking the time to work with an accountant, business advisor, or other professional can help ensure that you are taking the best actions possible for your 2020 taxes. This may require patience and strategizing, especially since the multitude of factors is putting additional strain on tax professionals as well as business owners.

Many businesses will likely attempt to balance how they can receive the best possible employee retention tax credit without reducing the amount of any new PPP loan. This may involve delaying a new PPP application to maximize the tax credit first, though this option may be less feasible to business owners who are struggling or fear that PPP funds may be depleted if they don’t apply quickly enough.

The employee retention tax credit was created under the CARES Act to encourage companies to retain workers despite economic hardship. Eligible employers were originally able to claim a credit equal to 50 percent of up to $10,000 in qualified wages, including qualified health plan expenses, on employee wages paid after March 12, 2020, and before Jan. 1, 2021. Eligible employers were defined as businesses or tax-exempt organizations that had to partially or completely suspend operations due to COVID-19, or had a significant annual decline in receipts.

The Economic Aid Act passed in December extended this period through June 30, 2021, and increased the rate from 50 percent to 70 percent. It also expanded eligibility by reducing the gross receipt decline requirement, increasing the employee cap, and allowing businesses that received PPP loans to claim the credit.

The employee retention tax credit is refundable, so employers may receive the payment of the portion of the credit that exceeds certain employment taxes that are due. Employers are also able to reduce their federal employment tax deposits or request an advance credit for any amount not covered by these reductions to seek more immediate relief.

Several other forms of tax relief are available under CARES as well as the Families First Coronavirus Response Act. These include refundable tax credits available to companies with 500 or fewer employees who were required to offer paid sick and family leave to their workers, as well as the option to defer the employer’s share of the social security tax.

FFCRA tax credits cover 100 percent of up to two weeks of sick leave and up to 10 weeks of qualified family leave paid by the employer. Employers can receive credits for both employee retention and paid leave if they meet the requirements for both, but not for the same wage payments.

Although guidance from the Treasury and IRS originally stated that businesses should not deduct expenses paid through PPP loans that had been forgiven, the Economic Aid Act overruled this stipulation by saying these expenses are still deductible. The legislation also specifies that gross income does not include PPP, Economic Injury Disaster Loans, or any other assistance through the CARES Act.

Businesses may also qualify for other tax relief under the new economic stimulus, including a higher deduction for businesses whose energy standards are above the industry average and a Work Opportunity Tax Credit that has been extended through 2025 and applies to employers who hire certain workers.

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