COVID-19 and 2020 Taxes
“Unprecedented times.” “The new normal.” “Now more than ever.”
These phrases have been used more times than we would have liked over the last year. However, we can’t deny that COVID-19 flipped the business world upside down. 2020 saw many new laws passed related to taxes, stimulus efforts, and more. Many of these laws continue to evolve and have been expanded. But what does it all mean for your company’s taxes for 2020 and thereafter?
Paycheck Protection Program (PPP) Loans
If your business accepted a Paycheck Protection Program loan and is looking for loan forgiveness, you need to apply within 10 months of the covered period. In terms of the effect this loan forgiveness will have on your taxes, if your PPP loan has been forgiven, it does not have to be included in your business’s gross income for federal income tax purposes, nor will the loan be counted as taxable income. Also, thanks to the Economic Aid Act, eligible expenses paid for with PPP funds are also deductible.
Families First Coronavirus Response Act (FFRCA)
The FFRCA was passed to help employers provide paid leave to employees affected by COVID-19 by providing tax credits to cover the cost of the employee leave. Self-employed business owners were also permitted to take leave under this act. Any employer payments of qualified sick pay and family leave wages are deductible as business expenses, in the amount of federal employment taxes before reduction by the tax credits. Business owners must include the full amount of credits for qualified leave wages in its gross income for the year.
Employee Retention Tax Credit
The Employee Retention Credit (ERC) is a provision of the Coronavirus Aid, Relief, and Economic Security Act (CARES) and provided a refundable payroll tax credit for the payment of qualified wages (including group healthcare expenses) in order to retain full-time employees, even if they were not working because of an interruption of business operations or decrease in revenue attributed to the pandemic. Originally, this credit was available for wages paid between March 13 through December 31, 2020, but the passage of the Consolidated Appropriations Act (CAA) in December 2020 expanded the provisions to include wages paid in the first half of 2021. This credit is applied to the portion of the employee’s Social Security taxes and is fully refundable.
Payroll Tax Deferral
In August of 2020, employers were offered the chance to defer Social Security payroll taxes for wages paid between September 1, 2020-December 31, 2020 in an effort to stimulate the economy. However, the deferred taxes do need to be repaid. Employers need to report any deferred amounts on Form 941 for the applicable quarter, and plan with their employees to take the additional withholding out of their paychecks in 2021.
Through various legislative efforts, businesses have had the opportunity to make up for some of their losses with the help of these loan programs, tax credits, and deferrals. And as cliché as the phrase has become this year, now more than ever, businesses need the help of a tax professional who can not only file their taxes, but can offer guidance and planning for the future.