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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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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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.
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.
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.
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.
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!
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!
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!
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!