Get ahead on your 2020 taxes and make the best decisions for your business today by taking advantage of tax relief programs and deferrals.
A number of tax changes were introduced to help small businesses get through the economic downturn caused by the COVID-19 pandemic. Many covered the 2019 tax year, but several are applicable for next year’s tax season as well. In some cases, the decisions you make now will affect the tax benefits you can claim for 2020. Some of these programs are mutually exclusive, so it’s wise to consider which ones will be more beneficial for your business next year. Here are the most important small business tax credits, deferrals and changes. Prepare now so you can maximize your small business tax benefits.
Credit for COVID-related Paid Leave Expenses
Employees of small businesses can receive up to 80 hours of paid sick leave when they are unable to work due to the coronavirus. As an employer, you can get a 100% credit for such expenses, including health insurance costs.
Here is some key information you need to know about the credit:
- The eligible expenses must be paid between April 1, 2020, and December 31, 2020.
- If one of your employees is recovering from the coronavirus, seeking diagnosis, or self-quarantining, you can claim credits of $551 per day up to $5,551.
- For employees who are caring for family members or children due to the coronavirus, the claim amount is $200 per day, up to a maximum of $2,000 total.
The process for claiming this credit is a bit confusing. Officially, the credit is offset against your payroll taxes when you submit Form 941. However, using this form can get complicated. The easiest way to claim this credit is to file Form 7200 and get a reimbursement.
If your small business is in no condition to pay sick leave related to the coronavirus, you can apply for an exclusion. Businesses with fewer than 50 employees that can document that paying sick leave wages will significantly hurt the business may be exempt from paying it.
Employee Retention Tax Credit
The employee retention tax credit is another credit available thanks to 2020 tax changes. As a small business, you can claim 50% of qualified wages paid after March 12th, 2020. For each employee, you can get up to $5,000 in credit.
To qualify for this credit, your gross receipts must have declined by at least 50% in the first quarter of 2020 compared to the same period last year, or you must have fully or partially closed down your business due to the coronavirus. Typically, these kinds of things can be documented with invoices and receipts from your accounting software.
You can claim this credit in two ways:
- Report the qualified wages each calendar quarter on your Form 941 and deduct that credit from federal employment taxes before paying them.
- Or, you can get a reimbursement for the credit by submitting Form 7200.
Net Operating Losses
The changes that the CARES act made to the amount and time frame for carry back of net operating losses will remain relevant for the 2020 tax year. However, not all businesses are eligible, so read the fine print carefully.
The 2020 tax year is the last year you can carry back net operating losses from 2018, 2019, and 2020. This is a great opportunity to get a bigger refund this year, given that you can carry back net operating losses for years that had a 35% tax rate, versus the current 21% rate.
To carry back a net operating loss, you must document it well, which means you need proof that the loss occurred. This proof can include bank statements, receipts, and invoices.
Employee Tax Deferral
The CARES act also enables small businesses to defer payment of employer Social Security taxes. This deferral applies to taxes paid between March 27, 2020, and December 31, 2020.
Social Security taxes have been deferred by quite a bit, which may affect your taxes in years to come. The new payment schedule is as follows:
- December 31, 2021: 50% of the deferred amount is due
- December 31, 2022: the remaining amount is due
As of this writing, Form 941 for your quarterly Federal Tax Return is under revision to accommodate the deferral, and more instructions will be offered soon. Check back with the IRS.
You can get this deferral if you’ve applied for the two tax credits we discussed earlier, but things get trickier if you have received a PPP loan.
If you have already received your Paycheck Protection Program loan and applied to get it forgiven, you are not eligible for the employee tax deferral. However, if you haven’t applied for a PPP loan yet, or haven’t filed the paperwork for loan forgiveness, consider what is best for your business: to get the loan forgiven, or to get the employee tax deferral.
Start Planning for 2020 Taxes Now
Taking advantage of these credits and deductions requires you to have a clear sense of your financials. An all-in-one accounting solution such as FINSYNC can help you keep all of your payroll, accounts receivable, and cash flow projections in one place for easy reporting and analysis by you and your tax professionals.
While it may feel far in the future, planning for your 2020 taxes now will help you make the best choices for your business, and ensure that you don’t leave any potential savings on the table. With all of the coronavirus-related changes, next year will be a complicated tax year. Preparing now will put your business in the best possible position.