It’s been a tough year. The COVID-19 pandemic has put many SMBs in danger and caused a stark dip in sales and revenue. In response, the federal government has extended efforts designed to alleviate some of this difficulty, including extending the deadline to file taxes for 90 days. But, that’s just the beginning: COVID-19 programs bring many changes and nuances that are important for small business owners to understand.
Read on to learn what’s changed and what you need to know before filing your taxes.
The New Deadline to File Taxes
Typically, the deadline to file your federal tax return is April 15; well … it’s July, so you likely know that the tax deadline has been extended for 90 days to July 15, 2020.
Still need more time? You can file a 4868 IRS form to request an extension; if your request is granted, your new date will be October 15, 2020.
Remember that the deadline for filing state taxes may be different than the federal deadline; check out tax guidelines by state.
I Got a PPP Loan—How Will This Affect My Federal Taxes?
The federal government rolled out the PPP loan in April, offering businesses across the country relief during the coronavirus pandemic. Any loan that is forgiven by a lender is not considered taxable income by the feds.
However, if your loan is not forgiven, it’s likely that the loan proceeds have not been spent according to the guidelines, which means that the loan will be considered taxable income. Make sure you are spending your loan according to guidelines to ensure a) you are eligible for forgiveness and b) your loan won’t be taxed.
The big catch: you cannot deduct expenses paid for with loan proceeds. Typically, expenses like payroll, utilities, rent/mortgage are deductible, but if you are using the PPP loan proceeds to pay for these (and you should be doing this in order to remain eligible for loan forgiveness), you cannot deduct these expenses.
Want to understand this a little better? The IRS has stated that their reasoning is based on the concept of a “double tax benefit.” Basically, if you aren’t being taxed on the loan proceeds, you can’t deduct the expenses you are using the loan proceeds for.
Two legislative efforts are currently underway to try and change the non-deductibility of expenses paid for with loan proceeds:
- Within the HEROES Act is a proposal to reverse this decision and allow expenses paid for by PPP loan proceeds to be deductible; this has not yet been enacted.
- The American Institute of Certified Public Accountants (AICPA) is challenging the non-deductibility of expenses paid with loan money; so far, no action has been taken as a result of AICPA’s efforts.
Your big takeaway: The forgiven amount of the loan will not be taxed as income, but any expenses paid for with the loan money, can’t be included in your tax deductions. Unless, of course, legislation is enacted to reverse this.
I Got a PPP Loan—How Will This Affect My State Taxes?
It’s currently unclear how individual states will handle taxing the PPP loan. There is a chance your state will follow the example of the federal government and exclude the forgiven loan amount from taxable income—but there is also a chance your state will do the opposite.
In order to get a clearer picture of how your state will likely proceed, you need to understand whether your state conforms to the federal tax code. For the purpose of simplicity, many states conform to federal tax guidelines while others do not. Take a look at this map to understand whether your state conforms.
If your state has rolling conformity or no individual income tax, you can probably expect that the forgiven amount of your PPP loan will not be taxed, but in other cases, the state legislature must enact legislation to allow favorable tax treatment.
Your big takeaway: Understand whether your state conforms to federal tax code, and stay up to date new legislation or developments in your state around taxing the PPP.
I Got an EIDL Grant—How Will This Affect My Taxes?
The SBA offers a relief option called the Economic Injury Disaster Loan (EIDL) to help struggling businesses. There are portions of the EIDL that are delivered as loans (which may be forgivable) and portions that are delivered as grants—like the $10K emergency cash advance—that also do not need to be paid back.
Both the loan portions and the grant (also known as: the emergency cash advance) are considered business income and should be reported in year-end tax filings.
Your big takeaway: While the proceeds from the EIDL will likely not have to be paid back, you will be taxed on this money.
My Employees Are Now Remote—How Will This Affect My Taxes?
If your employees are working remotely within the same state where your business is registered, your taxes will not be affected. However, if your employee has moved out of state, there may be tax implications across corporate taxes, sales taxes, income taxes and payroll taxes.
Due to the COVID-19 pandemic, many states have issued temporary guidance for employers of out-of-state employees. Find a state-by-state guide to payroll and income tax withholdings here.
I Receive Unemployment Benefits—How Will This Affect My Taxes?
A number of unemployment benefits and programs for employees and self-employed people have been released as a result of COVID-19. Among these are:
- State-level unemployment insurance
- Pandemic Unemployment Assistance (PUA)
- Federal Pandemic Unemployment Compensation (FPUC)
- Pandemic Emergency Unemployment Compensation (PEUC)
State-Level Unemployment Insurance
This is considered taxable income and either you can have taxes withheld from your weekly checks or you can elect to wait until year-end tax filing. Learn more about COVID-19 unemployment benefits in this state-by-state guide.
PEUC is a provision in the CARES Act that allows states to extend unemployment benefits by 13 weeks. Employers are not charged for PEUC benefits paid out to employees which is a crucial measure designed to give employers who may be stretched thin by payroll costs some much-needed relief.
PEUC is also available for the self-employed.
PEUC is considered taxable income, and in many states, you can elect to have applicable state tax withheld from your paychecks or wait to report this as income with your tax filings.
This assistance has been provided to those who are self-employed along with 1099 contractors in the form of support ranging from $205 to $648 per week. The program runs for 39 weeks starting February 2, 2020 and ending December 26, 2020. Eligibility is determined based on your 2019 income; if your federal taxes demonstrate that you earned a minimum of $16,480 in 2019, you are eligible. It should be noted that eligibility for PUA also allows you to access the Federal Pandemic Unemployment Compensation (FPUC) program benefits.
PUA is considered taxable income (along with any state benefits you may be getting), so if you have been receiving this, be sure to include it in your report.
In a landmark program, the federal government has provided direct payments of an additional $600 on top of regular unemployment compensation. FPUC has a maximum weekly payout of 26 weeks as long as one maintains state eligibility requirements.
This benefit is available to both employees and the self-employed.
FPUC is considered taxable, and just as in the case of state-level unemployment insurance, you can make a selection to either have the taxes withheld from your checks or wait until year-end.
Your big takeaway: Unemployment compensation is taxable. You will likely be able to elect whether those taxes are withheld from your paycheck or pay them at year end.
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What are COVID-19 Tax Credits and What Do I Need to Know?
A number of tax credits have been made available by the government to offer relief to businesses during the COVID-19 pandemic.
Employee Retention Credit
Made available to employers, the IRS released the Employee Retention Credit (ERC) as part of the CARES Act; this provides a refundable tax credit to businesses that have been forced to close or shut down. As an incentive to keep employees on payroll, employers of COVID-19 pandemic affected businesses may elect to receive a credit of up to 50% of $10K in payroll costs, per employee for wages paid between March 13, 2020 and December 31, 2020.
There is some small print here (for example, employers who have received SBA loans, like the PPP are not eligible); to understand the terms and conditions and whether you are eligible read all the details about the employee retention credit here.
Payroll Tax Deferral
Prefer to delay paying taxes rather than receive a credit? That’s an option under the CARES Act.
If you are self-employed or an employer, you can defer the 6.2% Social Security payroll tax through December 31, 2020. You will owe 50% of the deferred amount on December 31, 2021 and the remaining 50% will be owed on December 31, 2022.
This is optional so you can elect not to take advantage of this deferral, and if you utilize a third-party (like Gusto) to help you process payroll, you (the employer) assumes liability Keep in mind: If you have had loans forgiven under the CARES Act (like the PPP loan), you are not eligible for payroll deferral.
Paid Leave Tax Credits
The Families First Coronavirus Response Act (FFCRA) was signed in March and provides employers who employ less than 500 people with refundable tax credits. These tax credits reimburse employers for the cost of providing paid leave to employees who are absent from work due to the virus (either because the employee has contracted the virus or a close relative has).
There are two provisions detailed in the FFCRA:
- The Emergency Paid Sick Leave Act (EPSLA)
- This dictates that employees are entitled to up to 80 hours of 100% paid sick leave if they are unable to work for reasons related to COVID-19. If more time is required, 10 additional weeks may be granted at 75% of the wage rate. See here for more information.
- The Emergency Family and Medical Leave Expansion Act (Expanded FMLA)
- Eligible employees have up to 12 weeks of leave to use between April 1, 2020 and December 31, 2020; this time is included in (not in addition to) the total FMLA leave entitlement. See more information here.
The Tax Credits
In order to offset the costs of paying employees who are absent from work, the IRS is offering employers refundable tax credits equal to the paid sick leave wages that were rendered between April 1, 2020 and December 31, 2020.
A tax credit is also available for the employer’s share of the Medicare tax imposed on those wages and the costs of health insurance coverage during the employee’s leave. You can even get an advance on these credits by utilizing IRS form 7200; otherwise, simply use IRS form 941 to claim these credits at the end of the year.
Are you self employed? You get tax credits, too! If a self-employed individual contracts coronavirus, that individual is eligible for a credit that covers 100% of the sick leave equivalent; if a family member is ill with the virus and the individual must care for that family member, the tax credit will cover 67% of the leave amount. See here for more information.
Your big takeaway: Tax credits are complicated! Be sure to understand leave eligibility requirements and how to get reimbursed for leave paid with a tax credit.
For more information on navigating your small business needs throughout the COVID-19 pandemic, visit the Gusto COVID-19 Small Business Resource Hub. We got you.