While it will still take a few more months into 2021 to get back to something near normal (or at least pre- 2020 normal), one thing that hasn’t changed is tax season. Although the tax deadline was pushed to July last year because of the coronavirus pandemic, this year, the deadline returns to April 15, which means it’s time to get organized. Here’s what you need to know about your business’s tax filings for 2021.
CARES Act Tax Effects
New programs and tax incentives due to the COVID-19 pandemic will impact your 2021 tax filing in the following ways:
Paycheck Protection Program (PPP). Did you receive a PPP loan to help you keep employees on the payroll last year? The program has rebooted for 2021, but if you received funding in 2020, you need to keep track of how you spent the funds. The Flexibility Act (signed into law in June 2020) amended the CARES Act, changing PPP loan forgiveness requirements to allow 60% of the loan to be spent on payroll costs and the remaining 40% on rent, mortgage interest, and utility costs. All forgivable funds are not deemed taxable income for 2020, although any funds not considered forgivable is taxable business income.
The more recent Coronavirus Response and Relief Supplemental Appropriations Act of 2021 expanded the list of forgivable expenses. In addition to the allowed expenses listed above, other forgivable non-payroll costs include software and cloud computing services used for business operations, property damage expenses (not covered by insurance) due to civil unrest, essential supplier costs paid for before receiving the PPP, and worker protection equipment (PPE) expenses.
Economic Injury Disaster Loan (EIDL). Businesses that received the EIDL Advance funding (the EIDL) grant in 2020 do not need to count the funds as taxable income. However, if the company received the EIDL loan at the low rate of 3.75%, it must pay income taxes on the disbursed amount.
Employee Retention Tax Credit (ERTC). If a business (all entities except sole proprietors) had to fully or partially suspend business operations during any quarter of 2020 due to the pandemic (or if gross receipts substantially declined), the business is eligible to claim an Employee Retention Tax Credit. However, the company is not allowed to use the tax credit if it received PPP funding. The ERTC credit is equal to 50 percent of employee wages from March 12, 2020, to January 1, 2021.
Payroll Tax Deferment. Under the CARES Act, employers were eligible to defer the company’s portion of Social Security tax on employee wages from March 27, 2020, through December 31, 2020. The business must pay half of the deferred amount by December 31, 2021, and the rest must be paid by December 31, 2022. Again, if the business received a PPP loan, the tax deferment was not available.
Families First Coronavirus Response Act (FFCRA). Businesses that provided sick/family leave to employees affected by the pandemic are eligible for tax credits for 100% of sick-leave pay, family-leave pay, qualified healthcare plan expenses, and the employer’s share of FICA taxes for sick-leave costs.
Expansion of Charitable Gift Deductions. The CARES Act also temporarily raised the limit for cash donations from 10% to 25% in 2020. This deduction is only available to C Corps.
Expanded Interest Deduction. The deductible business interest expense has increased to 50 percent of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the 2019 and 2020 tax years.
Individual Business Loss Deduction. For business owners claiming business losses on their individual returns, the previous limitations were suspended for 2018-2020 tax years ($500,000 for couples and $250,000 for other filers).
Other Notable Business Taxes
- The Tax Cuts and Jobs Act of 2017 (TCJA) provided a 20% deduction for pass-through and corporate entities. Pass-through entities include sole proprietorships, partnerships, S Corps, and limited liability companies (LLCs). Qualifying business owners can deduct up to 20% of net business income from their income taxes. The deduction is scheduled to last through 2025.
- C Corps pay a flat 21% tax rate due to the TCJA.
- The TCJA also gave businesses a 100% depreciation deduction for depreciable business assets such as machinery, equipment, computers, appliances, and furniture the first year they are put into service (instead of claiming depreciation over several years).
A Sales Tax Forewarning
According to Avalara’s 2021 Sales Tax Changes Report, states hit hard by the pandemic plan to crack down harder on businesses and attempt to collect sales taxes from unregistered remote sellers and marketplace sellers. Although economic nexus laws have been in place since 2018, states have previously been slow to follow up on enforcement. Avalara reports “those days are over,” and state departments are under pressure to ensure tax compliance for any business having nexus in a state. Nexus is established if:
- The business has a physical presence (office space, warehouse, or retail store) in the state.
- The business conducts in-person meetings with clients or customers in the state.
- The business is structured as a limited liability company (LLC), corporation, or limited partnership (LP).
- The business has employees living/working in the state.
For example, suppose your business sells products through Amazon and stores inventory in a warehouse located in a state you are not located in. In that case, your business has nexus in that state. Businesses with nexus need to register for foreign qualification in that state and register for sales tax collection with the state’s Department of Revenue. In fact, Avalara’s report states the California Department of Tax and Fee Administration (CDTFA) has sent notices to Fulfillment by Amazon (FBA) sellers requesting past sales tax revenues.
Because tax laws change year to year, and there are tax regulations that apply specifically to your industry, it’s important to find a tax accountant with expertise in your market.