What To Know Before Filing Your Business Taxes This Year

Ready to leave 2020 in the past?

To help ease the pain of tax season, we asked Laura Jenkins, a tax partner with Citrin Cooperman, about a few things business owners should keep in mind when filing taxes this year.

How does PPP impact my business taxes?

The impact of PPP funds and loan forgiveness varies between federal and state taxes, and even among different types of business entities.

According to Jenkins, “Congress enacted the Consolidated Appropriations Act on December 27, 2020, which included a provision that reversed the Treasury’s position on the taxability of PPP forgiveness. PPP loan forgiveness income is not taxable and expenses paid for with PPP funds are deductible for Federal income tax purposes.”

Jenkins also notes that the Consolidated Appropriations Act treats the forgiveness income as tax-exempt income, “which means that for owners of S Corporations and partnerships, the forgiveness income will still increase the partner’s or shareholder’s tax basis, which enables them to utilize losses passed through from their companies.”

At the state level in Massachusetts, Jenkins mentioned that Governor Baker signed a new law so that PPP forgiveness income is not taxable in the Commonwealth, regardless of entity type.

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Are there any changes to the tax code due to the new presidential administration?

The short answer is that any impacts from the Biden administration will not come into play until it is time to file your 2021 taxes.

There are a number of tax proposals Biden has put forward that include a rate increase from 21% to 28% for corporations; elimination of the qualified business income deduction for taxpayers with an income over $400,000; a surtax on corporations that offshore manufacturing and service jobs in order to sell goods or services back in the American market; and a minimum tax on corporations with book profits of $100 million or higher. These are still only proposals, and business owners should consult with their accountant to determine the effects of any tax code changes or legislation to their business tax filings.

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Are there benefits available to taxpayers this filing season that a business owner should know about?

If your business received PPP funds, you may be eligible for employee retention credits (ERC). “In late December 2020, the Consolidated Appropriations Act (CAA) was passed, which makes ERC available to PPP borrowers retroactively. However, you cannot double dip and receive these credits on wages that were forgiven under the PPP,” Jenkins explained.

There are a lot of nuances, including the amount of credit you may be eligible for based on certain circumstances. Because an ERC extension was included in the recently signed American Rescue Plan Act, it’s best to speak with your accountant to determine what your business is eligible for.

Jenkins also shared that there may be some CARES Act tax implications on your business, such as:

• Net operating losses incurred in 2018, 2019, and 2020 can be carried back 5 years for 100% income offset and “immediate” refund of taxes previously paid. Generally, the tax rates were higher in the years that the losses could be carried back to.
• Small business taxpayers with gross receipts (prior 3-year average) below $26 million can use the cash basis method of accounting for income tax purposes, which often results in lower tax as you are not paying tax on accounts receivable (but you also cannot deduct amounts in accounts payable). These small businesses also are not required to apply the Uniform Capitalization Costs to Inventory (Code Section 263A).
• Interest expense limitation under Section 163(j) increased from 30% to 50% of adjusted taxable income for tax years 2019 and 2020, allowing companies to deduct more interest expense.

Some employees of my business were furloughed or laid off - will that affect my business taxes?

Many businesses unfortunately had to lay off or furlough workers when the pandemic caused business disruptions. Jenkins explained that employers qualified for the ERC who furloughed employees but continued to pay the employees’ health care costs can use those costs as part of the credit calculation.

Our best advice for filing business taxes this year?

Consult a tax professional to make a plan that works best for your unique circumstances. In a year like 2020, a CPA or other tax expert can look at the big picture for your business and help you work through tax strategies.

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