This past year has been a challenging time for businesses across various industries.
As a response to the pandemic, the government has attempted to blunt the impact of the forced closures and quarantines with several measures that get working capital back in the hands of the small businesses that are the most vulnerable.
Here are some of the most significant funding-related covid tax changes we feel small businesses should know about.
Families First Coronavirus Response Act (FFCRA)
In addition to requiring some employers to provide paid sick leave and paid family and medical leave, the legislation created reimbursable tax credits for any paid leave employees to take.
Those paid leave provisions of the FFCRA apply to businesses with fewer than 500 employees and make those employers eligible for tax credits designed to help enterprises afford the new paid sick leave and paid family leave benefits. The tax credit is fully refundable and available quarterly.
It can count against an employer’s already-owed Social Security taxes. Still, it can also be paid out as an advance against future taxes and increase if the business maintains health care during the employee’s paid leave.
PPP Flexibility Act
This legislation passed in June 2020, made critical adjustments to the PPP program to make its rules more understandable and practical for small businesses. These laws also made the PPP loans have a clearer (and easier) path to being forgiven.
One of the biggest COVID tax changes was that an employer with a forgiven PPP loan can still take advantage of the payroll tax deferrals outlined in the CARES Act.
Changes To The Economic Injury Disaster Loan (EIDL)
This program existed within the Small Business Administration before COVID-19 and was a way to help businesses during disasters. Congress and the SBA changed the program during COVID-19 to get more of these loans into the hands of the companies that might immediately need them.
The two types of aid paid out under the EIDL were a standard loan that had to be repaid over 30 years and was taxable just like a traditional loan would be and a grant of $1,000 per employee, up to $10,000, which would likely not be taxed due to falling under the “general welfare exception” in tax law. It is important to note that we are waiting for final guidance from the IRS on this matter.
CARES Act
Within The CARES Act:
- Small businesses and self-employed individuals can delay the employer portion of federal payroll tax payments. These Social Security taxes owed for 2020 can be deferred and paid over the next two years. It is important to note that, in this case, half of the delayed funds must be paid by the end of 2021.
- Small businesses with net operating losses (NOLs) for 2018, 2019, or 2020 can now carry those back five years. This also includes sole proprietorships.
- For 2019 and 2020, small businesses can increase their interest expense deducted from 30 percent to 50 percent on their tax returns.
Paycheck Protection Plan
Under the PPP refined guidelines, an unforgiven PPP loan would be due to be paid back within five years and taxed like a normal loan.
A forgiven PPP loan is tax-exempt at the federal level, so you would not owe any federal taxes for loan funds used for payroll, rent, and other qualified forgivable expenses. With that said, each state can require you to pay taxes on a forgiven loan, so make sure to double-check your state’s policies.
Additionally, it is important to note that any expenses paid with PPP funds, such as payroll rent and utilities, cannot generally be written off as they usually would be.
Navigating through the COVID tax changes and the complex tax and loan options available due to 2020 legislation can be confusing and challenging if you are a small business owner looking to file your taxes or understand your risks.
Feel free to contact our team with any questions at 913.901.6879.
