It’s not news that this has been a crazy year. Many small businesses have been negatively impacted by the pandemic. And yet, there are a number of businesses that have continued to operate profitably, some that have even thrived. Millions of government loans were received. Some businesses took advantage of tax credits and payroll tax deferrals. Millions of people were sent home to work. Others labored on through the worst of the outbreak. On top of that, our tax returns were extended into the summer, and accountants have been scrambling to keep up.
Now we have to make sense of all this, particularly when it comes to our taxes. That’s because our tax expense generally represents one of the largest costs to our businesses and personal lives. This is why it’s critical that, if you run a small business, you meet with your accountant right now to discuss what you need to do to make sure you’re minimizing your tax liabilities for 2021.
What questions should you ask? To me, these five come to mind.
1. Are my estimated tax payments correct?
Your estimates this year were likely based on what you made last year. But throw that out the door. This year has been an unprecedented year. Maybe you made a lot less. Or maybe you had a better-than-expected year. It’s very possible that the taxes you’re paying in this year do not reflect reality. Which means you could be paying a lot less. Or even a lot more. In the end, you want to be paying exactly what you owe, so when your accountant does your return next year, there are no surprises. So revisit your estimated taxes based on your current situation and make revisions for the last quarter.
2. What’s the impact of the government stimulus on my taxes?
Did you take advantage of the Paycheck Protection Program? Good for you. If your loans get forgiven, you won’t be taxed on that. Your expenses used for the forgiveness of PPP loans are also deductible. PPP isn’t the only government stimulus program that will impact your tax situation. If you paid employees for time off under the Families First Coronavirus Relief Act, then you’re entitled to a tax credit after the year is over. Even if you didn’t participate in PPP, you might have taken advantage of the new Employee Retention Tax Credit. If you deferred payroll taxes, you will still owe them next year. All of these things will impact your tax liability and need to be addressed with your accountant.
3. Should I put more away for retirement?
If you’re like many, you’ve probably been spending a lot less on food and consumer goods during the lockdown. If you’ve been building up some savings, it’s a great opportunity to sock some away for the future. Talk to your accountant about making more contributions to your 401(k) or IRA. Then, pass on what you learn to your employees because you want to make sure they’re putting enough away for their retirement, too. You’ll thank yourself a decade from now. So will they.
4. Should I buy capital equipment?
Economic downturns oftentimes turn up deals, and this one is no different. I’ve heard from many of my clients who are using spare cash or taking advantage of this low-interest rate environment to snap up needed equipment, furniture, technology and other capital items at steep discounts. Many of these purchases would qualify for accelerated depreciation under the Section 179 deduction, which means that a full deduction for the expense this year. That’s a huge tax savings. Are you eligible? Ask your accountant and consider investing.
5. What’s the tax impact of working from home?
You may be able to deduct more for your home office. But then again, you may owe more payroll taxes for employees who are working out of state. It’s a confusing environment right now and, depending on the specific makeup of your company and employees, you’ll need to make sure you understand if you’re facing any potential liabilities — or benefits.
Taxes are a huge expense. This year has been a hugely disruptive year. Combine those two facts together, and you’ll agree that in order to make sure you’re not facing a huge liability, you should be talking to your accountant sooner rather than later.
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This information is old and out of date and needs to be retracted. Congress passed legislation right around Christmas that expenses under forgiven PPP loans are deductible.
Thank you for commenting! We’re working on updating this article! This article was originally published before the new legislation.
Per #2: Expenses paid for using PPP funds ARE currently deductible! This sentence should be updated
Thanks for reaching out, Glenn! You’re correct. We’re working on updating the article!
The COVID-Related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021, P.L. 116-260, confirms that otherwise deductible business expenses paid out of PPP loans may be deducted for federal income tax purposes. May 1, 2021.
Thank you for commenting. We’re working on updating the article ASAP!
Your answer to #2 is incorrect. Please refer to IRS Rev. Rul. 2021-2 issued on Jan. 6, 2021.
Forgiven PPP loan proceeds are not included in income (as stated) AND the expenses paid for by the loan proceeds ARE deductible. The IRS reversed its initial position.
You’re correct, Steve! We’re going to update this article to make sure #2 is accurate. Thanks!
I believe that the statement (2) on this article about deductibility of expenses that are eligible for PPP loan forgiveness may need to be updated.
It does! We’re working on the update now. Thanks!
You may want to check your facts on #2. I believe the expenses are now deductible that were used with PPP money.
We appreciate your comment, Lisa! We are working on an update for that section of the article now.
Hi! I see this was originally written in 2020, and recently updated. Last I knew, Congress passed a law/resolution that all expenses paid for with a PPP loan would actually be deductible after all. You should look into that and revise the article if need be. I do find these newsletters helpful, so thank you!
Thanks for reading and commenting, Lenore! This article will be updated soon.
Hello- I am an accountant and I noticed this article said the expenses associated with PPP forgiven loan are not deductible. Just wanted to let you know that this rule was changed as of Jan 2021, and these expenses can be deducted. See IRS news release linked below.
Thanks, Nicole! We’re going to update the article.
See below regarding your item # 2 in your article. Expenses paid with forgiven PPP are tax deductible. Please issue a correction, see below Legislation from the U.S. Congress and the Internal Revenue Service.
In late December 2020, Congress stepped in. The COVID-Related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021, P.L. 116-260, confirms that otherwise deductible business expenses paid out of PPP loans may be deducted for federal income tax purposes. In addition, the legislation makes clear that the borrower’s tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness (since this is an off-Code provision unaffected by Sec. 108(b)). This legislation thus reversed the IRS’s position on the deductibility of expenses paid using forgiven PPP loans.
In response to the legislation, the IRS released Rev. Rul. 2021-2 on Jan. 6, 2021, which withdraws its initial positions outlined under Notice 2020-32 and Rev. Rul. 2020-27. More specifically, Rev. Rul. 2021-2 confirms that no deduction will be disallowed, no tax attribute will be reduced, and no basis increase will be denied by reason of the exclusion from gross income of PPP loan amounts that are forgiven. Accordingly, taxpayers that incurred or paid PPP-eligible expenses may deduct the amounts in the year paid or incurred, depending on their overall method of accounting, and may consider the full amount of such expenses in computing any related tax attributes. Such attributes include but are not limited to the research-and-development tax credit, the work opportunity tax credit, and other employment-related credits.
Thank you for reaching out, David! We plan to update the article.
The information regarding the PPP loan expenses not being deductible is outdated. That was overturned by the new regulations that came out in late February/early March.
You’re right, Diane! We’ll have an update up on the site soon for this article. Thank you!
Not sure where you got your information on the PPP loans, but the expenses are deductible even when the PPP loans are forgiven. Not all states have conformed, but in California they have conformed with one exception and that is you have to be able to substantiate that you had a 25% drop in revenue in any quarter in 2020 compared with the same quarter in 2019.
We’re going to update our article with more recent information! Thank you for commenting and reading SBA, Steve!
Answer #2 seems incorrect. According to modifications made to the PPP program by Congress in Dec 2020, expenses paid with the PPP loan are deductible regardless of the PPP loan being forgiven. At least at the federal level. Different states might have their own rules on how to treat the PPP forgiveness.
That’s correct. This article will be updated soon! Thank you for your comment!
With regards to PPP loans that are forgiven, they are not taxable for federal tax purposes. However, for state income tax purposes, each state sets its own laws. In New York, for example, the forgiven loan is taxable. Some states are not taxing the forgiveness. Expenses paid with PPP funds ARE deductible for federal tax purposes. This law was passed a few months ago. Again, each state has its own set of laws regarding deductibility of expenses. New York allows a deduction.
Thank you for commenting, Susan! We’re going to update this article with the right information.
My comment should read “In New York, …the forgiven loan is NOT taxable”. I inadvertently forgot to include the word “NOT” which is most important. Typed my comment too fast!
Actually, the expenses used towards PPP forgiveness ARE deductible, as part of the Consolidated Appropriations Act announced on December 27, 2020. Additionally, if a tax-payer did file a return without the deductions, they are able to claim them in 2021.
We’re going to update the article as soon as possible, Laura! Thank you!
Would like to know more about the PPP LOAN FORGIVENESS PROGRAM. If the loan is forgiven in 2021 for the proceeds from 2020, will it be taxable in 2021?
There are no longer any tax impacts of PPP loans for federal purposes. You may have a state tax issue (though most states have also been consistent with the Fed government) so check with your accountant.
Under the Act, both first and second round PPP borrowers who receive loan forgiveness (i) may claim deductions for covered expenses funded by PPP loan proceeds; (ii) do not have to reduce tax attributes; and (iii) are not denied basis increases.
Text in Item #2 is incorrect. “Did you take advantage of the Paycheck Protection Program? Good for you. If your loans get forgiven, you won’t be taxed on that. But here’s some bad news: as of now, the expenses you incurred that are eligible for forgiveness aren’t deductible either, and that can create a huge tax liability.”
By statute, expenses used for the forgiveness of PPP loans are deductible and the forgiveness of indebtedness remains nontaxable. This overturns the holdings in Notice 2020-32 and Revenue Ruling 2020-27. You should update your text accordingly.
This is true. The piece was written before the latest stimulus bill that made these expenses non-taxable. However, be aware that some states are still taxing forgivable expenses so talk to your accountant.
This article is contrary to the Consolidated Appropriations Act, 2021. President Trump signed the bill into law Sunday, December 27, 2020.
Congress stepped in and clearly stated that business expenses paid with forgiven PPP loans are deductible. Section 276 of the bill states:
For purposes of the Internal Revenue Code of 1986—
‘‘(1) no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in subsection (b),
‘‘(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1),
This is true and it should be updated. You are reading an article that was published well before that Act.
Hi, this is good content. Will there be more like this?
Yes! We have new posts all the time on SBA! You can also see more of our accounting articles here:
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