The economic impact of the COVID-19 crisis has been vastly different across businesses and industries. While restaurants, retail shops, and travel have been severely impacted, some sectors, including food processors, grocers, and medical equipment companies, are busier than ever.
Most business owners have been impacted by COVID-19 in multiple ways. The federal government introduced several forms of tax relief to support businesses as they navigate the ongoing economic impact of the pandemic.
Most of these changes are the result of the Families First Coronavirus Response Act (FFCRA) and the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), which jointly serve to help employers and employees survive the ongoing COVID-19 economic crisis. While these new laws helped millions of businesses, they also created new tax and accounting requirements which have led to numerous questions for business owners.
Tax Incentives
The CARES Act includes several tax incentives designed to help businesses during the COVID-19 pandemic. A few of the tax changes that many small and medium-sized business owners will be able to take advantage of include:
The Employee Retention Credit
If your business has been hit hard by the pandemic, you may be able to claim a tax credit of up to 50% of qualified wages (up to $10,000) paid to your employees. You qualify if you had to fully or partially suspend operations due to a coronavirus shutdown order or your business has declined by more than 50% (compared to the same calendar quarter last year). There are limits to this credit, including how much you can claim per employee.
Credit for Sick Leave Payments
The Families First Coronavirus Response Act (FCRA) requires small and medium-sized businesses (fewer than 500 employees) to provide sick leave benefits to employees. Sick leave could apply to employees who are sick, caring for sick family members or caring for their children. If you provide these benefits to your employees, you could qualify for a refundable sick leave tax credit based on how much you paid out.
Deferred Payment of Payroll Taxes
Employers can defer payment on the employer contribution of Social Security payroll taxes through the end of the year. Half of this deferred amount would be due on December 31, 2021, and the other half would be due by December 31, 2022.
Modification of Net Operating Losses (NOL)
This allows NOLs from 2018, 2019, and 2020 to be carried back five years and allows NOLs to fully offset income. This change is intended to allow businesses to use losses and amend prior year returns to provide liquidity during the pandemic.
Modification on Limitation of Losses for Sole Proprietors and Pass-Throughs
This change temporarily lifts the loss limitation for sole proprietors and pass-throughs with the intention of allowing them to utilize excess losses to provide necessary cash flow.
Increase to Interest Expense Deduction
The increase raises (from 30% to 50% of taxable income) the limitation on the interest that businesses are allowed to deduct from their 2019 and 2020 taxes.
Paycheck Protection Program
If you were one of the millions of business owners that took advantage of the Paycheck Protection Program (PPP), there are additional tax implications. A PPP loan can be forgiven as long as at least 60% has been spent on employee payroll costs. The other 40% of funds are allowed to be used for other business purposes. Forgiven PPP loans are exempt from federal taxes but some states may require recipients to pay taxes on these loans.
Deciphering these Solutions Requires Professional Assistance
Regardless of how profitable or unprofitable 2020 was, business owners know that taxes consume a significant portion of their bottom line and any tax savings can have a significant impact.
Rapidly changing tax laws create many challenges for business owners and working with an experienced accounting firm is the best way to ensure you avoid costly mistakes. When you work with a reputable accounting firm, you’re partnering with a team of experts who understand the tax codes and can leverage them to your advantage.
Nolan Accounting Center offers tax planning and preparation services designed for both individuals and small business owners. Our knowledgeable team will make sure that you benefit from all of the latest federal, state, and local tax regulations. Our tax preparation services help ensure you receive every deduction you are entitled to and help you plan for future tax filings.
At Nolan Accounting Center, our team of accountants and CPAs provide accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin including Milwaukee, Greenfield, New Berlin, Muskego, West Allis, and Waukesha. We look forward to helping you with all of your accounting needs.