Coronavirus Small Business Tax Changes: Everything You Need to Know

Throughout 2020, the U.S. government has passed multiple pieces of legislation to help businesses impacted by COVID-19 shutdowns and economic slowdowns. While many of these new laws have helped millions of businesses, they also have created a slew of new tax and accounting changes for them as well. Trying to keep up with all of these changes can be challenging for small businesses, especially those simply trying to get by in the coronavirus era.

Here are commonly asked questions about tax obligations related to the aid provided by CARES Act, Paycheck Protection Program, Families First Coronavirus Response Act and more.

What new coronavirus programs and laws did the government add that could impact my taxes?

First, let’s outline the major pieces of legislation that aimed to help businesses impacted by COVID-19. These include the following:

• Families First Coronavirus Response Act (FFCRA): The FFCRA included a handful of provisions that impacted businesses, including requiring some employers to provide paid sick leave, new paid family and medical leave and new tax credits for the paid leave.
• Coronavirus Aid, Relief, and Economic Security (CARES) Act: The CARES Act, passed in March 2020, provided large-scale assistance to businesses and individuals. We cover the many tax breaks and tax changes included in the CARES Act below.
• Paycheck Protection Program (PPP): The PPP emergency loan program, one of the biggest parts of the CARES Act, was authorized to distribute more than $600 billion in forgivable loans for small businesses. A PPP loan can be forgiven as long as at least 60% has been spent on employee payroll costs. The other 40% of funds are allowed to be used for mortgage interest, rent and utility payments. Forgiven PPP loans are tax-exempt but there are still other considerations we cover below.
• PPP Flexibility Act: This law, passed in June 2020, made important changes to the PPP loan program and made it easier to get the loan forgiven. In terms of tax changes, the only major impact of the PPP Flexibility Act was making it so an employer with a forgiven PPP loan can still take advantage of payroll tax deferrals outlined in the CARES Act.
• Economic Injury Disaster Loan (EIDL) program changes: The Small Business Administration’s EIDL loan program existed before COVID-19 as a way to help businesses during disasters. Congress and the SBA made changes to the EIDL program in order to provide more loans and cash advances, some of which are taxable. More information on these changes can be found below.

It’s possible the government may pass additional legislation in 2020 that will impact year-end business taxes further, so be sure to check with a tax professional at the end of the year to make sure your books are in order.

What new tax credits and changes are included in the CARES Act?

The CARES Act included many tax credits and tax changes that were intended to provide short-term relief to businesses hurting from COVID-19 shutdowns and lost revenue. These credits and changes include:

• Businesses may be eligible for the new Employee Retention Tax Credit. This credit can provide up to $10,000 per employee. More details on how the tax credit works can be found below.
• Businesses and self-employed individuals can delay the employer portion of federal payroll tax payments. These payments, which are comprised of Social Security tax owed for 2020, can be deferred and paid over the next two years. Fifty percent must be paid by the end of 2021 and the other half must be paid by the end of 2022. (Relatedly, President Trump signed an executive order in August giving employers the ability to defer the employee portion of federal payroll taxes for four months.) More information below.
• Businesses that have net operating losses (NOLs) have had some of their limitations relaxed. If your business had an NOL in a tax year beginning in 2018, 2019 or 2020, that NOL can be now be carried back five years instead. Pass-through businesses and sole proprietors can also take advantage of relaxed NOL limitations.
• Businesses that were due to receive corporate alternative minimum tax (AMT) credits at the end of 2021 can instead claim a refund immediately.
• Businesses are able to increase their business interest expense deductions on their tax returns. For 2019 and 2020, the amount of interest expense businesses are allowed to deduct on their tax returns is increased to 50% from 30% of taxable income.
• Businesses, especially those in the hospitality industry, are able to immediately write off costs associated with improving facilities.

Can my business take advantage of the new Employee Retention Tax Credit (ERTC)?

If your business did not take out a Paycheck Protection Program (PPP) loan, then you may be eligible for the Employee Retention Tax Credit (ERTC). The tax credit is worth 50% of qualifying wages, with payment up to $10,000 per employee. It applies to wages paid from March 13, 2020, through January 1, 2021.

Businesses and nonprofits can receive the ERTC if either your business operations were fully or partially suspended as a result of government-mandated COVID-19 shut-down order, or your business experiences a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019. Eligibility for the second condition ends if gross receipts in a quarter exceed 80% compared to the same quarter in 2019.

Businesses don’t have to wait until the end of the year to claim the credit, and they can file it on their quarterly Form 941. Notably, employers may not claim the same employee for the ERTC and the Work Opportunity Tax Credit during the same period.

Will I owe taxes on a PPP loan?

More than five million U.S. businesses have opted to take PPP loans, so trying to sort through the tax implications related to them is highly important. If a PPP loan is not forgiven, it would be treated like any other loan obligation that you have and must be paid back within five years. A forgiven PPP loan is tax-exempt at the federal level, so there you wouldn’t owe any federal taxes for loan funds that you used for payroll, rent and other expenses. However, some states may require you to pay taxes on a forgiven PPP loan, so check your local regulations.

Notably, using the PPP loan can reduce how much you can write off on your business taxes, as expenses that were paid with PPP funds cannot be written off. Usually, expenses like payroll, rent and utilities are deductible from your normal taxable income, and it means you owe less tax at the end of the year. Without the deduction, your business may owe more taxes than it normally pays.

Can I write off payroll, rent and utilities as business expenses if I used a PPP loan to pay for them?

No. To go into more detail, you cannot write off these types of expenses if they were paid for with PPP loan funds. A forgiven PPP loan is basically an untaxed grant and, as such, the IRS wants to prevent employers from receiving a “double tax benefit.” This means some businesses will have higher taxable revenue in 2020 due to not being able to write off as many expenses, so this will be important to take into account.

Are all businesses eligible for family and sick leave tax credits provided by the Families First Coronavirus Response Act (FFCRA)?

The paid leave provisions of FFCRA apply to businesses with fewer than 500 employees (although in limited cases businesses with fewer than 50 employees can seek an exemption). Those employers are eligible for tax credits from FFCRA that were created to help businesses afford new paid sick leave and paid family leave benefits. Companies can get fully refundable tax credits each quarter, with the credits being applied against an employer’s already-owed Social Security taxes. Businesses can also seek advance payment of tax credits to offset leave payments as well. Additionally, an employer’s tax credit can be increased if the employer pays to maintain health care related to new sick leave and family benefits. This allows a company to maintain health benefits while the employee is on paid leave.

Notably, businesses can use tax credits from FFCRA while also having and using a PPP loan. However, businesses are not permitted to use PPP loan funds to pay for sick and family leave if the business is expected to get an FFCRA tax credit for that leave.

Can I defer payroll taxes through the end of 2020?

Yes, employers are allowed to defer payroll taxes (as specified in the CARES Act) from March 27, 2020, through December 31, 2020. The PPP Flexibility Act, which was enacted on June 5, 2020, actually changed the rules further so employers can still defer these taxes even after a PPP loan is forgiven. Fifty percent of the deferred taxes that accumulated in 2020 must be paid by December 31, 2021, and 50% of the deferred amount must be paid by December 31, 2022.

Additionally, President Trump signed an executive order in August 2020 to defer the collection of federal payroll taxes between September 1 to December 31, 2020, for employees who make up to $104,000 annually. Many businesses have questions about how they will be able to implement this, but more guidance should be coming from the Treasury Department to answer these questions.

How will EIDL loans and grants be treated for tax purposes?

Some businesses took out Economic Injury Disaster Loan (EIDLs) from the Small Business Administration in order to help pay expenses during COVID-19 disruptions. The expanded EIDL program includes two different types of aid: a standard loan that must be repaid over a 30-year term or a cash advance that provided a $1,000 grant per employee, up to a maximum of $10,000. The loan option is still available to businesses in need and is not treated differently from any other loan for tax purposes. Cash advances, which do not need to be repaid, are no longer available. The cash advances are most likely not taxable because they would fall under the “general welfare exception” in tax law, but the IRS has not issued final guidance to confirm this yet.

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