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10 Ways Your Small Business Could Benefit From COVID-19 Tax Relief In 2020

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If you do not take advantage of these COVID-19 tax relief in your 2020 tax planning, you may be throwing away money that could help you sustain your business.

However you look at the events of the last eleven months, it is the least to say 2020 has been a year unlike any other. And it is undeniable to say that even more uncertainty is still to come on the public health and socio-economic-political fronts before the year concludes. During such times, tax planning is far from top of most people’s minds. Nonetheless, tax planning is even more important now than in any ordinary year.

In response to the Coronavirus pandemic, congress passed some major legislations in 2020, including the Families First Coronavirus Act (FFCRA), Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 and, in addition, there is last year’s Setting Every Community Up for Retirement Enhancement (SECURE) Act. You also can’t forget about the massive Tax Cuts and Jobs Act (TCJA) that generally went into effect two years ago but still impacts tax planning. Plus, it’s possible that there could be more tax law changes before year-end — or that the potential for changes next year could affect 2020 planning. To get all these tax laws work for you, tax planning is essential in 2020 more than ever.

With that in mind, let us look into some of the ways your small business can take advantage of the COVID-19 tax relief legislation. You may use these assessments to work closely with your tax advisor to identify the best strategies for your particular situation. He or she also can keep you apprised of any new tax law developments that might affect you.

Deductions might provide bigger tax-saving opportunities this year.

AIthough most TCJA provisions went into effect a couple of years ago, that 2017 law is still having a significant impact on planning for income and deductions. For example, the TCJA generally reduced tax rates, and deductions save less tax when rates are lower. The TCJA also reduced or eliminated many deductions. But the CARES Act has enhanced a few deductions, and it’s possible more tax breaks could be enhanced before year-end. Proper timing of deductible expenses and taking advantage of other breaks can help maximize your tax savings.

Taxpayers can choose to either itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

The TCJA nearly doubled the standard deduction for each filing status. Those amounts are to be annually adjusted for inflation through 2025, after which they’re scheduled to drop back to the amounts under pre-TCJA law.

The combination of a higher standard deduction and the reduction or elimination of many itemized deductions means that some taxpayers who once benefited from itemizing are now better off taking the standard deduction.

The new Employee Retention Tax Credit could provide up to $10,000 per employee.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created a new employee retention tax credit for employers who are closed, partially closed, or experiencing significant revenue losses as a result of COVID-19. The new employee retention tax credit is a 50% tax credit for the first $10,000 of compensation, including the employer portion of health benefits, for each eligible employee.

Under the Families First Coronavirus Response Act, employers are allowed a credit against the employer’s (but not the employee’s) share of Social Security and Medicare taxes imposed on employee wages. Employers and employees each pay an equal share of both Social Security taxes (6.2 percent each) and Medicare taxes (1.45 percent each). The credit amount is equal to 100 percent of the qualified Family Leave wages paid by the employer during the calendar quarter and is applied against the employer’s total 7.65 percent share of Social Security and Medicare taxes. Thus, the credit takes into account the above-described caps for paid Family Leave—i.e., $200 per day and $10,000 total per employee.

Make the most of this year’s business losses

Under the CARES Act, certain small businesses can apply a net operating loss generated in 2018, 2019 or 2020 to income from the past five years for a potential immediate refund. This rule change could even be an incentive to take steps to increase your losses in 2020 by incurring more expenses. You’ll have the option to amend past returns or carry losses forward for future tax years, which is yet another reason to talk to your tax advisor about this issue.

You may be able to claim refunds for unused tax credit carryovers from 2018

The TCJA repealed the corporate alternative minimum tax (AMT) and provided an opportunity for corporations to claim a refund of minimum tax credit carryovers during 2018-2021. The CARES Act makes any remaining minimum tax credit carryovers fully refundable in 2019. Alternatively, corporations can elect to claim a refund for the unused carryovers in 2018.

The increase in business interest limitation may reduce your taxable income.

The business interest limitation was added by the TCJA and generally limits the deduction for business interest expense to the sum of (1) business interest income; (2) 30% of adjusted taxable income (ATI); and (3) floor plan financing interest. Certain small taxpayers are exempt from the limit.
The CARES Act increases the limit to 50% of ATI for 2019 and 2020, potentially increasing interest expense deductions and thereby reducing taxable income (or creating an NOL that can be carried back). Taxpayers may elect to use their 2019 ATI in computing the 2020 limit, providing relief to those whose income declines in 2020. Taxpayers can elect to apply the more restrictive 30%-of-ATI limit if desired.

The payroll tax deferment may mean more working capital

The CARES Act allowed businesses to defer paying their 6.2% share of Social Security payroll taxes incurred between March 27, 2020 and the end of 2020. However, half of the deferred funds will have to be paid by December 31, 2021, and the other half of the deferred funds by December 31, 2022. So now’s the time to talk to your tax advisor about how to plan for this liability. This provides a great liquidity benefit, but business owners should consider the impact on deductions before the end of the year. Businesses generally cannot deduct their share of payroll taxes until paid. For most businesses, the value of deferring the actual payment is worth also deferring the deduction, but there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the rate arbitrage benefits discussed above. Some taxpayers using specific methods of accounting may also be able to pay the taxes as late as 8½ months into 2021 and still claim the deduction for 2020.

Avoid complications from payroll costs in relation to PPP loans

The CARES Act created the Paycheck Protection Program (PPP), which authorized small businesses loans to cover employee salaries and certain other expenses. Assuming certain conditions are met, businesses can apply to have those loans forgiven. You may have heard that forgiven PPP loans are not taxable. That’s true, but the full tax picture is far more complicated. That’s because the IRS has stated that otherwise deductible expenses, such as payroll costs, will not be tax-deductible if they are funded with PPP loan proceeds. Consult with your tax advisor about how PPP loans will be taxed.

Working from home? You may still be able to deduct home office expenses

If you’re an employee and work from home, under the TCJA, home office expenses aren’t deductible through 2025 — even if your employer has required you to work from home during the pandemic. Why? For employees, this is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor, and the TCJA suspended such deductions. If you’re self-employed or own a home-based business, you may still be able to deduct home office expenses.

You might be able to deduct more charitable donations this year

Generally, donations to qualified charities are fully deductible — but only if you itemize deductions. Fortunately, the CARES Act allows taxpayers who claim the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020.

If itemizing no longer will save you tax because of the increased standard deduction, you might benefit from “bunching” donations into alternating years so that your total itemized deductions in those years would then surpass your standard deduction. You can then itemize just in those years.

For large donations, discuss with your tax advisor which assets to give and the best ways to give them. For example, making large cash donations this year might be beneficial because the CARES Act increased the 2020 deduction limit for such gifts to public charities from 60% of adjusted gross income (AGI) to 100% of AGI.

Overall Takeaways

Keep in mind that it’s possible that legislation could be signed into law that would suspend or alter some of the TCJA provisions affecting deductions or make other changes to deduction rules. Also be aware that there are other types of taxes that could affect you and should be factored into your planning, such as the alternative minimum tax (AMT). We can help you determine if you’re among the small number of taxpayers who still need to plan for the AMT after the TCJA. Check with us or your tax advisor for the latest information.

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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