As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
The previous year was a difficult one for many small businesses. With 2020 in the rearview mirror, it’s time to think about filing taxes and how new provisions like Paycheck Protection Program (PPP) loans and the Employee Retention Tax Credit can affect how you file with the Internal Revenue Service (IRS). We’re going to focus on how those provisions impact business tax filing for 2020, and what deductions your business may be eligible for this time around.
This article will examine the impact of provisions specific to small business tax filing in 2020, including:
- How to file your taxes
- COVID-19 tax credits and loans
- Tax deductions
- Potential tax relief
The tax season begins on February 12, 2021, and the due date for tax filing is April 15, 2021.
Filing Your Taxes as a Small Business Owner
The last major piece of legislation was the 2017 Tax Cuts and Jobs Act. Most of that Act does not pertain to small businesses, though, so the majority of changes this tax year will be due to the pandemic.
Small business owners have to navigate through tax credits, loan programs, and Acts that were put in place to help small businesses during the COVID-19 pandemic. The basis of these programs comes from the CARES Act, which passed in March and created the Paycheck Protection Program and expanded the Economic Injury Disaster Loan (EIDL) program.
As a small business, there are four primary taxes to know about:
- Income tax. All businesses will file an annual income tax return.
- The one exception is partnerships, which file information returns instead.
- Employment taxes. As a small business with employees, you have taxes (and forms) related to payroll taxes:
- Social Security and Medicare taxes
- Federal income tax withholdings
- Federal unemployment tax
- Excise tax. These taxes are for purchases of specific goods – and are typically included in the product cost. A full list of excise taxes can be found here, and they include:
- Excise tax on coal
- Sports wagering
- Motor fuel excise tax
- Estimated taxes. Some businesses have to pay quarterly estimated tax payments. This applies if you do not have taxes withheld from each paycheck. Many sole proprietors and individuals will have to make these payments.
One of your primary responsibilities, as a small business owner with employees, is to prepare and file Form W-2, Wage and Tax Statement to report wages, tips, and other compensation paid to an employee. You may also be responsible for property tax and sales tax – the latter typically comes out of goods and services sold.
If you are self-employed or a sole proprietor, there are other taxes and things to know. We will be running a separate article on filing taxes as a single-employee business soon.
COVID-19 Credits and Loan Information
Congress and the IRS authorized tax deductions, breaks, incentives, and credits for businesses this year due to COVID-19. We’re going to cover the new tax credits and loans here, but the IRS has a full list of general tax credits available.
Generally, business tax credits are applied against the taxes owed and companies are able to subtract them from the total. They are different from a deductible because
- tax credits offset the amount of taxes owed, and
- deductibles focus on the taxable income before taxes owed.
Business tax credits are designed to encourage specific behaviors by the business – such as keeping employees on the payroll during an economic crisis – and provide a direct reduction in taxes by the government. There are four specific tax credits that occurred this year as a direct result of the pandemic and coronavirus aid that small businesses received.
Economic Injury Disaster Loans
If you applied for and received an Economic Injury Disaster Loan (EIDL) to help during the COVID-19 economic crisis, that money is tax-free. It will not be included in your taxable income when you file. You can deduct expenses covered by using the EIDL. This is a change for the EIDL that came from the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) and is reflected in the December legislation.
Employee Retention Tax Credit
The Employee Retention Tax Credit is a fully refundable tax credit available to eligible businesses that retained employees. It is equal to 50 percent of qualified wages – compensation, wages, and qualified health plan expenses – paid during the pandemic.
Eligible employers are businesses that
- were forced to fully or partially close due to a government-mandated shutdown, or
- experienced a significant decline in gross receipts – more than 50 percent for any given quarter (after the first quarter in 2020) when compared with the same quarter in 2019.
Not everyone is eligible for this tax credit.
- The CARES Act did not require employers to pay qualified wages, and some employers opted not to pay employees during this time. They are not eligible for the tax credit.
- An employer that received a PPP loan is also not eligible for the Employee Retention Tax Credit.
The IRS states that employers are eligible for a tax credit equal to 50 percent of qualifying wages, up to $10,000 per employee for wages paid between March 13, 2020, and December 31, 2020.
Families First Coronavirus Response Act (FFCRA)
The FFCRA requires public employers and private employers with less than 500 employees (which includes most small businesses) to provide paid sick leave and paid family leave options for employees due to the coronavirus pandemic. Employees can request leave if they:
- have been told to quarantine or self-isolate
- are experiencing symptoms
- are caring for someone who is quarantining or self-isolating
- caring for a child whose school has closed or care provider is unavailable due to COVID-19
The Act designates three types of paid leave:
- Two weeks (up to 80 hours) of paid sick leave at the regular rate of pay because the employee has to quarantine and/or is experiencing symptoms.
- Two weeks (up to 80 hours) of paid sick leave at two-thirds the regular rate of pay because the employee has to care for an individual quarantining or has to care for a child whose school or child care provider has closed.
- Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the regular rate of pay because an employee has to care for a child whose school or child care provider has closed.
- This is for employees that have been employed with the business for at least 30 days.
According to the IRS, eligible employers who contribute qualified sick leave wages and qualified family leave wages for employees – per the FFCRA – can claim a refundable tax credit worth 100 percent of the qualified wages.
Paycheck Protection Program
The Coronavirus Response and Relief Supplemental Appropriations Act, passed in December 2020, changed a lot of the guidelines for the Paycheck Protection Program. Some of the big changes that will affect small business owners filing taxes this year are:
- A forgiven PPP loan is completely tax-exempt and therefore not taxable income.
- Payroll, rent, and utilities can still be written off as tax deductions if you used a PPP loan to pay for them.
- Businesses can take out a PPP loan and obtain the Employee Retention Credit (see above) for both 2020 and 2021 as long as the two do not cover the same payroll expenses.
- Employers can defer paying payroll taxes – even after a PPP loan is forgiven.
- 50 percent of the deferred taxes accumulated in 2020 must be paid by December 31, 2021, with the other 50 percent paid by December 31, 2022.
The Paycheck Protection Program’s second round of funding is live now.
Small Business Tax Deductions
Tax deductions – or write-offs – are expenses that you can deduct from your taxable income. (Taxable income is typically your adjusted gross income – after deductions or exemptions – that is used to calculate how much you may owe in taxes that fiscal year.) Deductions can be for business expenses and costs that are ordinary and necessary, such as:
- Rent. The cost of office space or a retail location is fully deductible.
- Home Office. If you have a dedicated workspace in your home – which could be applicable to many small business owners this year – then you are eligible to deduct expenses from that portion of your home.
- The simple deduction allows you to deduct mortgage interest and real estate taxes as well as a standard deduction of $5 per square foot of the home used for business (maximum 300 square feet).
- Advertising. Business cards, flyers, and digital marketing are all fully deductible expenses. Any promotional materials for your business can help reduce your taxes.
- Vehicle. If you can verify that the vehicle is used for the business, then you can deduct operation costs.
- There is a simple deduction option that allows you to deduct “57.5 cents per mile driven for business use.”
- Utilities. Costs such as heat, lights, power, telephone services, and water and sewage are deductible as long as they are not for personal use.
- Travel. Although the coronavirus pandemic has greatly limited travel, if you incurred any business travel costs this year – such as flights, hotels, and other transportation – then you can deduct those.
- Employees pay. Wages, salaries, bonuses, non-cash compensation, and benefits for employees are tax-deductible.
All of these deductions will help lower your taxable income and reduce the amount of taxes you have to pay this year. Eligibility is determined by the IRS and can change. This is just a general overview, so it is best to work with a CPA or tax preparer to ensure you are getting all the deductions applicable to your business.
More Potential Tax Relief?
Although there is no more official tax relief coming to small businesses soon, there are programs in the works from Congress and the Biden administration. In particular, the American Rescue Plan would extend the refundable tax credit for employee leave that covers 100 percent of the cost for small business employers.
On February 4, 2021, after an all-night voting session in preparation for the American Rescue Plan, Senators agreed to a motion to block tax rate increases on small businesses during the coronavirus pandemic. The plan – from Senators Marco Rubio (R-FL), Tim Scott (R-SC), and James Lankford (R-OK) – ensures that “small businesses do not face tax hikes while they are struggling to keep their doors open during this public health crisis,” Senator Rubio said in a statement.
Small businesses suffered during one of the worst economic depressions in a generation due to the COVID-19 pandemic. Many were forced to close and will not be able to file taxes this year due to lost revenue and closed doors. But for those small businesses still open, they are filing taxes with hope for relief in the future.
Filing This Year
Although we are going through some of the basics of tax filing for 2020, it is important that you are engaged in your company’s tax planning. This could mean using a tax professional or tax software to file and compiling all necessary tax forms and tax documents from your company and the IRS website.
With the complications for filers this year, due to the coronavirus pandemic, it is recommended that you work with a CPA or tax preparer before filing to ensure that you are utilizing all of the potential tax breaks and tax refunds available to you.
This tax-filing piece is tailored to small business owners, and we will be publishing another piece on filing as a sole proprietorship, self-employed individual, contractor, or single-employee business (including LLCs) soon.