This has been a complicated year for individuals and businesses alike for many reasons. The impacts of the 2020 coronavirus pandemic and subsequent economic downturn have given both a new set of financial concerns with which to deal. In addition, all the losses incurred and federal relief programs introduced this year mean tha filing may be messy and complicated for 2021 business tax returns.
All of those factors can make the prospect of the upcoming tax season seem daunting, to say the least. When you’re unsure of how to approach your taxes, it’s always wise to consult with a tax professional to ensure you’re doing everything correctly.
Here are some important considerations that will help you start preparing so you know exactly how to report your losses and account for other changes.
1. You Can Leverage Losses for Tax Benefits
COVID-19 is a federally declared disaster, which is good to remember when you’re getting ready for tax season. Disaster is never a positive thing, but there’s a small silver lining: You may be eligible to deduct your losses if your business has suffered financially because of the pandemic. Here’s what you need to know:
- Eligible hits include perishable inventory, loss of rental income, and costs incurred from terminated contracts or agreements.
- The tax code allows taxpayers to carry disaster losses from the prior tax year, which could lower your tax burden.
- You could carry back losses on capital assets such as stock because of the disaster.
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act made some significant changes to net operating losses (NOLs) for businesses.
A company sustains an NOL when its allowable tax deductions are larger than its taxable income. An NOL can be carried forward to future tax years to offset income and reduce tax liability. The CARES Act removed the 80 percent limit of taxable income for taxable years before 2021, allowing a five-year carryback, giving small businesses greater accounting flexibility.
2. There Are CARES Act Considerations
The Payment Protection Program (PPP) loans and other CARES Act relief initiatives provided temporary aid to small- and medium-sized businesses, but there are some things to remember. For example, you could incur penalties in 2021 if you fail to file your tax return on time, pay the applicable taxes, or pay estimated tax if applicable.
On a positive note, though, PPP loans that end up being forgiven are not subject to income tax. Here’s a look at some of the other tax credits that will be important to keep in mind as you prepare your business’s tax return for 2021:
- Business Tax Credits
COVID-19 also sparked several tax credits for businesses to help them financially. These include the payroll tax credit for sick and family leave and the employee retention tax credit.
- Payroll Tax Credit
The Families First Coronavirus Response Act (FFCRA) gives qualifying employers tax credits for employee wages paid if they took leave because of COVID-19. Eligible employers may receive credit for the full amount of sick leave or family leave they covered for their employees. They can also deduct related health plan expenses and their share of Medicare tax. These credits apply to leave taken between April 1, 2020, and December 31, 2020.
- Employee Retention Credit
The Employee Retention Credit is a refundable tax credit equal to 50 percent of the qualified wages an employer pays to employees between March 12, 2020, and December 31, 2020. The limit is $5,000 per employee, up to $10,000 of wages (including certain health plan costs). Note that PPP loan recipients are not eligible for this credit.
- Pass-Through Deduction
The pass-through deduction still applies to qualifying businesses that are sole proprietorships, partnerships, S corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs). The pass-through deduction is 20 percent of qualified business income — which is substantial — so make sure you know if you qualify.
Business expenses and employee pay or benefits are not the only funding that will see changes in taxes this year. The charitable contributions limit was also raised under the CARES Act, so businesses can now deduct more for donations. The deduction limit is 25 percent of a corporation’s taxable income in 2020, up from the 10 percent previous limit.
3. Planning with Tax Experts is More Important Than Ever
It is crucial to understand all your tax obligations as companies begin to plan for the 2021 tax season, and the rules and regulations can often seem like they’re changing by the minute. In addition to an ever-changing political and economic climate, the many possible tax credits, relief provisions, and more can complicate even the easiest of processes. That makes it important to have a trusted tax expert partner on your side to help you navigate everything your company needs to know to file properly and take advantage of beneficial tax credits.
If you’re not sure how to prepare your 2021 business tax returns or if you have any tax-related questions and are simply seeking guidance, it’s always a good idea to talk to a professional. The Silver Tax Groups team of tax attorneys can help you figure out how to claim your business losses and evaluate everything that happened in 2020. We’ve been following each and every change as it unfolds, and our staff knows the ins and outs of taxes during this uncertain time. we can’t wait to help you review your companies documents to make sure you’ve got all the T’s crossed and I’s dotted.
2021 Tax Questions?
When you need assistance with any tax-related questions, contact Silver Tax Group to talk to an experienced tax attorney.