The impacts of the COVID-19 pandemic were not limited to health risks. The business impacts of the pandemic were far-reaching. Between dramatic losses in revenue or needing to close for safety reasons, businesses had to reduce their employees, adapt their business models, or face permanent closure.
The government passed various measures for businesses to offer relief from the economic impact of COVID-19. As 2020 has drawn to a close and businesses prepare for the tax season, what impact will these measures have on their tax returns? And what else can businesses expect when filing their tax returns this season?
Below is an outline of tax implications for different businesses. Working with a CPA can help business owners further understand how each act impacts their tax return filing this year.
The CARES Act
Businesses Included: Varies
On March 27th, 2020, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was signed into law. It contained many tax provisions to help both individuals and businesses.
Some of these provisions will reduce taxable income, or increase the amount of loss that businesses will show on their tax returns. When applied correctly, it can mean that the business will owe less in taxes for 2020.
Employer Tax Credit
Eligible employers can receive a tax credit against employment taxes. If business was fully or partially suspended due to government authority that limited commerce, travel, or group meetings, the credit applies.
Employers are also eligible when businesses had reduced gross receipts. The business had to show a reduction of more than 50% in a single quarter. This is in comparison to the same quarter of the previous year.
The tax credit applies to 50% of qualifying wages. The credit has a limit on qualifying wages of $10,000 for each employee for all quarters. Certain employees are not included or subject to additional limitations.
Payment of Employer Payroll Taxes
Businesses may have taken advantage of delaying the payment of payroll taxes when it became available. Employers could defer their share of the 6.2% Social Security Tax. In 2021, half of the deferred amount is due, with the remaining balance due in 2022.
Net Operating Loss Carryover
The CARES Act changed the rules and allowed businesses to carry NOLs in 2018, 2019, and 2020 back five years. Previous legislation in 2017 had eliminated NOL carrybacks for specific years and was limited to 80% of taxable income. The 80% limitation was removed for tax years beginning in 2021.
Relaxed Limits on Business Interest Expense Deduction
The CARES Act increases the amount of the interest expense businesses can deduct on their tax returns. The previous limitation was 30%. Under the CARES Act, the limit increased to 50% temporarily.
Businesses can also use the 2019 adjusted taxable income for the purpose of applying the 2020 interest expense limitation. This can be a significant benefit to taxpayers. It may also create some additional NOLs, which fall into the NOL modifications made.
Expanded Alternative Minimum Tax Credit
Additional companies could claim the refundable AMT tax credits. This provided businesses with opportunities to claim the credit for prior years (2018 and 2019). There was also an expedited refund process to get the cash into the hands of corporations.
Families First Coronavirus Response Act
Businesses Included: Any that had employees that took Family Leave or Sick Leave under the Act
The Families First Coronavirus Response Act was signed into law on March 18th, 2020. It required certain employers to provide employees with paid sick or expanded family and medical leave for reasons related to COVID-19.
Under the Act, employers were granted refundable tax credits equal to 100% of the qualified paid leave provided by employers. Employers also receive a credit against the employer’s share of Social Security and Medicare taxes during the time of the Family Leave or Paid Sick Leave. Qualified health plan expenses may also fall under the credit.
Paycheck Protection Program Loans
Business Included: Any that received a PPP Loan
The Paycheck Protection Program (PPP) gives direct relief to small businesses for keeping workers on their payroll. Businesses could apply for a loan through the Small Business Administration (SBA) for an amount equivalent to qualifying wages of their employees. If businesses spend the loan on eligible expenses and all employee retention criteria was met, the SBA would forgive the loan.
The loan forgiveness is explicitly excluded from gross income. The Consolidation Appropriations Act was signed into law on December 27th, 2020. The law clarifies that businesses can claim business deductions that were paid for with PPP funds.
The Consolidation Appropriations Act also opened up another round of PPP funding. Businesses could begin to apply in January of 2021.
Self-Employed Tax Implications
Businesses Included: Self-employed individuals
Individuals that are self-employed can also claim a credit under the Families First Coronavirus Response Act. If the individual would have qualified for leave as an employee, the individual can claim the credit. Both qualified Sick Leave and Family leave apply.
Under the CARES act, self-employed individuals could claim Pandemic Unemployment Assistance (PUA). The benefits were available for self-employed workers, independent contractors, and gig workers. These individuals would otherwise not apply for unemployment assistance.
For those that received PUA benefits, income tax would need to be paid. If not enough income tax was withheld from the unemployment payments, this would be payable on the 2020 return.
Self-employed workers could also apply for Economic Injury Disaster Loans (EIDL). These loans could also receive a grant of $1,000 per employee, up to $10,000. Self-employed individuals had to show “economic injury” as a result of the impact of COVID-19 on a business.
Unlike PPP loans, the EIDL is considered a grant. Therefore, a business will need to add the money to taxable income. Business expenses would be deductible from the EIDL income.
Preparing for the Impact of COVID-19 With a CPA
While every tax year brings about changes and new guidance from the IRS, 2020 was a particularly complicated year. The legislation passes in response to the impact of COVID-19 provided some relief for businesses. However, it created a more complex tax situation for business owners to unravel.
In this year, more than any others, businesses will want to ensure that they take advantage of every tax break available to them. Rather than attempt to understand so many changes on their own, businesses should turn to an experienced tax accountant for help.