Tax season is upon us. Here are some curveballs COVID-19 may have thrown your small business and questions to ask as you prepare for Tax Day.
Many business owners will find that the 2020 tax filing process will reflect the past year’s challenges. Depending upon how your business fared financially and what type of government aid you received, your tax filing process could be more stressful than usual.
Filings for the 2020 tax year will be complicated by:
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Multiple changes to the tax code, many in response to the pandemic
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The need to account for stimulus money
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The details associated with PPP Loans and forgiveness programs
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Pandemic-caused changes to the financial status of businesses
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Pandemic-caused changes to the work status of individuals
The pandemic upended lives and the economy. Throughout the year, business owners have had to make special accounting concessions because of COVID-19. It follows that yearly tax filing for such a historic year will not proceed as usual.
Start by asking the right questions
In addition to your typical year-end fiscal wrap-up, you should be considering these questions:
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Will you or your business be impacted by any of the 2020 tax code changes?
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Did you or your business receive stimulus money?
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Do any of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions apply to your business and employees?
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Did you apply for and receive a PPP Loan?
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What changed in your individual or your company’s financial status because of the pandemic?
Your answers will dictate how complicated your tax filing will be, how much time you should spend preparing for tax day, and if you will require expert help to avoid making tax-related mistakes.
Notable changes to the 2020 Tax Code
In addition to the pandemic-related considerations, the overreaching tax law passed in December 2019 caused significant changes to the way 2020 taxes would be calculated. Some highlights include:
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Retirement plans – changes in the age of minimum distributions and contributions
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Income tax brackets – while the rates didn’t change, the brackets are wider
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Standard deductions – amount raised for married couples, singles, and head of household filers
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Capital gains – rates did not change, but the income thresholds to qualify went up
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Employer fringe benefits – some caps have been raised (parking allowances), and the amount of deferments raised (health flexible savings plans)
Also, beware of any interest you received on your federal tax refund in 2020. It is taxable, and you must report it. Expect to receive a Form 1099-INT if you received $10 or more in interest.
In addition to changes at the federal level, 26 states and Washington D.C. also had notable tax law changes that may affect your 2020 filings.
Accounting for stimulus money
Even though Economic Impact Payments (commonly known as “stimulus money”) are not taxable, the amount must be reported on your taxes. This could eventually help your finances if it is determined that you did not receive as much stimulus money as you were entitled to. You will not be liable for any overpayments.
If you receive a Notice 1444 from the government, keep it with your tax records. You may be eligible for a Recovery Rebate Credit on your tax year 2020 federal income tax return.
The fine details of the CARES Act
You will have tax implications if your business took advantage of any programs offered through the CARES Act, the Paycheck Protection Program (PPP), the PPP Flexibility Act, and updates to the SBA’s Economic Injury Disaster Loan (EIDL). Here are some possible ways your business or personal taxes will be affected:
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Although PPL loan amounts that have been forgiven are not taxable, any amount received by a business that was not forgiven will be taxed as income.
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Expenses paid for with a PPP Loan that have been forgiven will not be counted as deductible business expenses.
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If your business deferred payment of its employee payroll taxes, they will become due in 2021.
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If your business provided sick and/or family leave in 2020 to employees because of the pandemic, you might be eligible for tax credits.
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If you made charitable donations on behalf of your company to eligible organizations, you might be able to claim more deductions than were allowed in 2019.
Dealing with changes in status
If any of your employees were unemployed in 2020 and received unemployment benefits, they must pay taxes on those payments. This could be especially difficult for those who did not have any taxes withheld from their payments when issued. They may find that they owe more taxes than they’d budgeted for and will need to work out an alternate payment method with the IRS.
Similarly, if an early withdrawal was made from a retirement account, that will need to account for. While it won’t be assessed a tax penalty on 401(k) withdrawals, it will be taxed as income. Fortunately, the IRS allows three years to pay that tax.
For workers who retired as scheduled or took an early retirement option in 2020, 2019 changes to the tax code and provisions in the CARES Act may affect the amount of taxes owed for 2020.
When an expert’s help is required
Taking care of your small to medium business’s tax and compliance needs is never easy, but it is tremendously more challenging this year. Of course, having an efficient way of maintaining critical records throughout the year makes the task easier. But even the most meticulous record-keepers will want professional, experienced help to decipher the fine print and complexities of an ever-changing tax code.
For peace of mind concerning your company’s financial health, look to the small business experts at Franco Blueprint. We specialize in guiding small and medium-sized businesses during startup and assist with managing your company’s accounting needs as it grows. We will help you strategize for success and help you cover all the bases for tax management and financial compliance.
It is our business to assist small business owners and help them secure their livelihoods. Contact us for a free consultation today.