IRS Rules are Changing (for the Better) for Business Owners Due to COVID-19

For several months all eyes have focused on getting through the changing dynamics with our revenue, our teams, and our operations intact. Now that we’ve navigated most of the business hurdles of Q2 2020, many are swinging back to longer-term planning. 

For those of us that have participated, the PPP program has necessitated a look at our accounting and reporting operations. For some, this has meant opening new checking accounts to help better manage our paper trail. We have also had many more discussions with our CPAs to ensure we set ourselves up to handle our fiduciary responsibilities properly. 

Many do not begin planning for tax season until Q4, but there has been much talk about shifts in tax credits and deferrals that you should begin looking at now.

James Jack, Seth Carpenter, Paul Crisci, and Brad Dillon of UBS conducted a useful podcast in April, framing the immediate and long-term ways that Covid-19 might financially impact business owners.

Although final decisions have not been made on all the items below, it is essential to begin thinking about them now as they could impact you at Fiscal Year-end, and possibly in years to come.

Changes in 2019 tax filing and payments

Many of us were finalizing our taxes when the world went into a remote work stance. For those that did not file for an extension, the government moved the federal tax filing and payment deadline to July 15, 2020. 

July 15 seemed like a lifetime away, but it is important, particularly as many of us begin focusing on re-opening our businesses, not to lose track of time. If you still need additional time to complete your federal taxes, you can still file for an extension using Form 7004.

Also, states have different policies and deadlines, so ensure that you comply with your local state guidelines. No one wants to deal with penalties at a time like this. 

Potential changes that may benefit you on your 2020 taxes

To further assist with the continuity of business and provide relief for small businesses, some tax policy is under review. It is worth looking at these areas to see if you should be recording or tracking things differently, rather than waiting until year-end and trying to backtrack. 

  • Delaying payment of Employer Payroll Taxes to 2021 and 2022 – While the administration continues to advocate for changes to payroll tax policy, there are interim discussions about potential deferrals or delays in employer payroll taxes. It is important to note that those who received PPP funding will not be eligible for this payroll tax relief. Understandably, if you’re using forgivable government funding to make your payroll, they would not offer a deferral. Again, payroll taxes are very much in flux, but it is crucial to keep an eye on this, particularly if you did not qualify for or participate in the PPP Program, and are looking for financial relief.
  •  Changes to Net Operating Loss Rules – When businesses record net operating losses, they are typically limited to the period they can use those losses against profits. There is a discussion that if you paid tax on earnings in recent years (specific periods to be determined), you might be able to claim losses in 2019 and 2020 against those past profits to receive a refund. For example, if you had a banner year in 2019 and paid a sizeable tax bill, only to suffer a significant loss this year in 2020, you may be eligible for a refund against past taxes. This could inject critical cash back into your business. Work closely with your CPA to ensure you are accounting for all losses of income and Covid-19 related costs to ensure you appropriately state this year’s profit or loss to recover what you can from previous year’s performance. 
  • Increases to the amount of interest expense businesses may deduct (potentially) from 30% to 50% for 2019 and 2020 – Given the number of working capital loans and financial relief packages that business owners seek at this time, interest expense is expected to be an increasing cost of doing business. Be sure that your CPA is working with the latest tables when it is time to calculate your deductions. If you have already filed and paid your 2019 taxes, and the IRS enacts this change, you may be eligible to take additional deductions on interest you paid on your 2019 taxes. 
  • Employee retention tax credits of 50% up to $10,000 per employee on wages paid from (dates in flux) 3/12/20 through 1/1/21 for COVID-19 impacted businesses – This particular tax credit will require much more definition before it is finalized. Not unlike the PPP and the SBA Disaster Loan program, the definitions for an “impacted business” continue to change as do the dates of the impact period. It is worth your time to work with your CPA to see if you qualify for this tax credit once the rules are finalized as the credit amount could be substantial. Note: There are different rules for those that employ under and over 100 employees, so be sure to review the guidance. 
  • Tax credits for employers who offer paid leave to those with Covid-19 – According to the IRS, “The paid sick leave credit and paid family leave credit are available for eligible employers who pay qualified sick leave wages and/or qualified family leave wages from April 1, 2020, through December 31, 2020, and who have fewer than 500 employees.” This program may change in the coming months in terms of the amount and function of the tax credits. Be sure to visit the IRS site for updated guidance. 
  • Payment deferrals on existing loan programs – Although it isn’t specifically tax-related, many loan programs are currently adjusting or deferring repayment schedules. Check with the SBA—or if you have payment programs in place with the IRS or traditional lenders—to see if your repayment schedule can be amended to your benefit. 

While anything related to taxes typically causes me to break out in hives, I love it when the word “tax” is combined with the word “relief.” If you’ve been operating with sub-par accounting help in recent years, now is the time to ensure you have a qualified advisor. Ensure you have the help you need to take full advantage of programs that can keep you in business while you pay your fair share.