Here’s everything you need to know about how the 2020 U.S. relief programs will affect your tax return this year and next.
Thank you to FreshBooks for providing this article for small businesses regarding taxes this year. If you need software to help you, please download their program.
To say that 2020 was a challenging year for U.S. small businesses is an understatement. To help self-employed individuals and business owners weather the storm and continue operations, the U.S. government has spent billions in tax credits, loans, and tax rule modifications. While these modifications are helpful, they are not as straightforward as getting a check in the mail.
Many of the relief programs will affect your taxes, making filing in 2020 (and 2021) different than any years in the past. To help, you’ll find a summary of the aid below and what it means for your small business when filing taxes.
Tax Relief Available to Small Businesses
To help support small business owners through the COVID-19 crisis, the following acts were established:
FAMILIES FIRST CORONAVIRUS RESPONSE ACT (FFCRA)
The first major act passed to help American employees and their families was the Families First Coronavirus Response Act (FFCRA). It focused on mandating sick leave for employees and expanded paid family leave. It also gave employers a tax credit for providing these benefits.
CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES)
In March 2020, the $2.2 trillion CARES Act was signed into law providing a range of support initiatives. There were a substantial number of tax relief initiatives created to support small businesses, many that were required to close for a period of time. This act is responsible for many of the small business relief programs covered in this article.
CORONAVIRUS RESPONSE AND RELIEF SUPPLEMENTAL APPROPRIATIONS ACT (CRRSAA)
In December 2020, the $900 billion CRRSAA was signed into law. It answers some questions regarding tax treatment from the CARES Act programs and provides more funding for small business relief programs.
Loan Programs, Tax Credits, and Tax Changes
Here’s a list of 5 programs, credits, and tax changes aimed to help small business owners make ends meet during COVID-19.
PAYCHECK PROTECTION PROGRAM
The Paycheck Protection Program (PPP) was the headline of the CARES Act. Created to encourage businesses to maintain payroll, it offers loans to cover payroll and other costs. While these are low-cost loans, the main draw is that they are forgivable as long as certain criteria are met. Not only that, the forgiven loan is not considered taxable income, and expenses paid with its proceeds are tax-deductible.
You can draw up to two PPP loans. The deadline for applying for these loans is March 31, 2021.
These loans aren’t offered directly through the SBA, though they do have a lender match tool available to help you find a lender to work with. You can learn more about both PPP draw options on the SBA website.
TAX CREDIT FOR EXTENDED PAID LEAVE BENEFITS
The FFCRA created 2 additional forms of extended paid sick leave available to employees:
- An employee who is sick or quarantined due to COVID-19 will receive two weeks (up to 80 hours) of paid leave benefits. The paid leave is up to $511 per day or $5,110 in aggregate.
- An employee who is caring for someone who is quarantined or a child whose school or childcare is closed can receive two-thirds of their pay, up to $200 per day for up to two weeks.
In addition to the paid sick leave, there is expanded paid family leave available to employees who are caring for someone who is quarantined or a child whose school or childcare is closed. They can receive up to two-thirds of their pay, up to $200 per day for 10 weeks.
Employers who pay these benefits are eligible to receive a fully refundable tax credit equal to the required sick leave benefit payments. These tax credits are currently available for paid leave benefits through March 31, 2021.
For more information on COVID-19 tax credits for paid leave, see this FAQ.
EMPLOYEE RETENTION CREDIT
As part of the CARES Act, a tax credit was created to help incentivize businesses to keep employees on payroll. A business is eligible to receive a payroll tax credit if they keep employees employed despite a business closure or decline in business receipts. This credit is worth up to $5,000 for 2020 and $7,000 for 2021.
When this credit was initially created, businesses couldn’t use both the Employee Retention Tax Credit (ERTC) and the PPP Loan. However, the CRRSAA has changed that. Businesses are now able to take advantage of both the PPP and ERTC, so long as the two programs aren’t used to cover the same payroll costs.
This tax credit is available through June 30, 2021. Learn more here.
NET OPERATING LOSS CARRYBACK RULES
Prior to the Tax Cuts and Jobs Act of 2017, businesses were allowed to carryback any net operating losses (NOL) to prior tax years. By amending tax returns, they were allowed to carryback their losses for 2 years.
When you carryback losses to prior years, you are able to deduct the losses from previous years’ profits. This results in an immediate refund from prior year taxes paid, giving struggling businesses a cash boost to help them get through a tough business year.
But once the Tax Cuts and Jobs Act went into effect, options for dealing with NOLs were limited. Businesses were no longer able to carry them back and were limited in how much they could carryforward each year.
The CARES Act allows businesses to carryback losses from 2018, 2019, and 2020 for five years. It also removed the limit on any losses carried forward from 2018 and 2019. With this carryback allowance, small businesses or self-employed individuals that record a loss in 2020 can amend prior-year tax returns to carryback losses and potentially receive a refund in taxes paid.
For the most up-to-date information, check out the IRS website.
PANDEMIC UNEMPLOYMENT COMPENSATION
Independent contractors and self-employed people are usually not eligible for unemployment assistance. Under the CARES Act, that changed. Individual states were given the option to expand unemployment benefits and offer them to independent contractors and self-employed people.
Benefits were also increased. Initially, an additional $600 per week was provided for up to 13 weeks, through July 31, 2020. Once that ended, the Lost Wages Assistance Program provided an additional $300 per week.
The benefits were extended again in January 2021 to provide an additional $300 per week, for up to 11 weeks through March 14, 2021. It’s important to note that these unemployment benefits are taxable income—anyone receiving these payments is required to either make estimated tax payments or have taxes withheld from the unemployment payment.
Unemployment benefits are administered through your state. Check with your state unemployment insurance office to see what benefits you qualify for.
Preparing for Tax Season
If you were able to take advantage of these tax relief programs, you’ll have some significant changes to your taxes. Here are 3 ways to prepare your 2020 tax return with confidence:
USE AUTOMATED ACCOUNTING TOOLS
It’s crucial to have accurate numbers, especially if you prefer to file your taxes on your own. But calculating all the crucial numbers yourself in an Excel spreadsheet can lead to costly data discrepancies. Cloud-based accounting solutions, like FreshBooks, make it easy to automatically track your income, capture your expense receipts, and pull all the reports you need to complete your tax return.
GET YOUR BOOKS IN ORDER WITH A BOOKKEEPER
Working with a professional all year round can help you keep your books in good standing come tax season. If things are a bit disorganized this time around (no judgment!), our bookkeeping partners at Bench can help.
LEAVE THE FILING TO THE PROFESSIONALS
Don’t have time—or want—to do your taxes yourself. Try Taxfyle. They pair you with professional CPAs or Enrolled Agents to make working with a tax professional simple. Here’s how Taxfyle can take end-of-year tax filing off your plate.
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ABOUT THE AUTHOR
Erica Gellerman is a CPA, MBA, content marketing writer, and founder of The Worth Project. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, and more. She currently lives in Hawaii.