For the millions of small businesses that are struggling due to COVID-19, preparing for this year’s taxes might seem like the last thing on their minds. Yet, as difficult as it might be to examine your finances right now, taking the time to explore all your options with an accountant can ultimately save you a lot of money in the long run. In today’s episode, Jon Aidukonis and Gene Marks discuss several policies that can help you defer and lower your business taxes for 2020.
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0:29—Today’s Topic: What Should Small Business Owners Do to Prepare for Their 2020 Taxes?
1:46—If your business participated in the Paycheck Protection Program (PPP) and took out a loan, keep in mind that while the forgiveness of the loan is not taxable, the expenses that you incurred while applying for forgiveness are not deductible either. Failure to discuss this with your accountant can result in a significant tax bill at the end of this year.
5:04—Business owners who are paying payroll taxes have the option of deferring half of that payment until the following tax year, without incurring any additional interest.
5:59—According to the Employee Retention Tax Credit Policy, businesses that experienced a 50% or more decrease in revenues this year, quarter by quarter, are eligible for a tax credit of up to $5,000 per employee, per quarter. Only businesses that did not participate in the Payment Protection Program are eligible for this tax credit.
6:58—Under the Emergency Family Leave Act, small business owners must continue to pay their employees, even when they cannot work due to COVID-19. However, you can still receive tax credit for their wages once the year is over.
12:17—Talk to your accountant about the Acceleration Depreciation policy, which qualifies your business for a deduction on any capital equipment that you purchased.
13:36—Small business owners should look into developing a Cash Balance Defined Benefit Plan because it would enable them to qualify for numerous deductibles while also saving for retirement.
14:37—Business owners who have been investing in new products or designs can apply for the Research and Development Tax Credit.
- Payment Protection Program
- Employee Retention Tax Credit
- Emergency Family Leave Act
- Absence Management
- Acceleration Depreciation Tax Deferment
- Research and Development Tax Credit
Jon: Hi, everybody. Jon Aidukonis here, and I’m with my cohost, Gene Marks. And welcome back to The Hartford Small Biz Ahead podcast. On today’s episode, we’re going to be talking a little bit about everybody’s favorite topic, paying their taxes and 2020 tax planning. So Gene, how are you doing?
Gene: Sorry, Jon. I fell asleep while you were introducing the topic.
Jon: It’s a riveting subject, taxes.
Gene: It gets a bum rap. I mean, come on, Jon. I mean, this is 20 to 30% of our income here. I mean, and by the way, if you’re running a business and you’re bored by taxes, you’re not alone, most people are. But it is kind of our biggest expense. And I don’t know, the smarter people that I know pay attention to what they’re doing. They don’t let a tax policy drive their actions necessarily, but they definitely take it into consideration.
Jon: Yeah. No, for sure. I mean, it is, to your point, it’s a large chunk of the bills that get paid. And I think this year, there’s a whole new level of consideration on what’s considered a tax deduction, what are available for credits, what are other things we have to pay, if you’re an employer who’s in a state or region that had emergency leave acts put in, or if that affects you. I mean, it’s a whole new world in so many definitions is this year, but I think especially as we think about what we have to account for in our tax planning.
Gene: Yeah, it is. And I want to start this off, because I just wrote about this recently, not on Small Biz Ahead, although I really should do this for Small Biz Ahead, but it has to do with one big potential tax liability for a lot of business owners that participated in Paycheck Protection Program, Jon. That was obviously a very, very popular program. It’s still going on as we’re recording this.
It’s the program where business owners can get forgivable loans to pay for their employees, this amount of non-employee tax expenses. And that’s all well and good. But if you got a Paycheck Protection Loan, and you expect to get most if not all of it forgiven, like most of the business owners that I know and most of my clients, you better be really careful, and here’s the reason why. The forgiveness of the loan is not taxable. So that’s good news. However, the expenses that you’re using to apply for forgiveness, like your payroll expenses, your health insurance, your rent, your utilities, those expenses, they’re not deductible either.
And where that brings you into a trap is that if you’re running a business, like many, that are struggling, but still doing okay this year, maybe your revenues are flat, they’re certainly not growing, or maybe they’re a little less than last year, but you’re struggling along, and you’ve been impacted by COVID, and you got a Paycheck Protection Loan, and you’re paying in your estimated taxes based on last year’s profits, well guess what? Your profits this year, if your revenues are about the same, they’re going to be higher this year.
Now the reason why is because all that money that you’re spending on payroll, and some of those non-payroll expenses that you’re getting forgiven, that won’t be deductible this year, which means your taxable income is going to be higher, and if you’re not paying in the amount of taxes that you need to, you could be facing a whopping tax bill after the end of this year. So please, talk to your accountant about that now, because that is a potential big liability that you could be facing.
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Jon: Yeah. I mean, that’s huge for people to consider, because I think that the selling point on this program was that it was low interest, tax deductible money, I think, in so many people’s minds. And that’s clearly not entirely true. But again, it was a very complex program. So I guess it really depends on your unique situation.
Gene: Yep. That’s exactly right. And we’re hoping that Congress picks this up, and makes that change by the end of the year. The American Institute of Certified Public Accountants, of which I’m a proud member, is fighting hard to make these expenses deductible. And right now, as we speak, they give it a 50/50 chance that Congress will act and make these expenses deductible. But it may not happen. And you’re trying to plan out your expenses for the year, you should be taking that into consideration.
Jon: Right. I mean, so on the liability side, that’s an unpleasant update. But were there any tax credits that were made available through any of the other relief facts? Because I feel like there were some that were made possible in the Cares Act, right?
Gene: There are few big tax moves that you could be making this year that I think could save you a lot of money, or at least save you on cash flow. So one of them is a deferral, and one of them is a credit. And actually there’s two credits. But let me just get the deferral thing out of the way first, Jon.
If you’re paying payroll taxes in your business, for your employer’s portion of payroll taxes, the 6.2% payroll tax, just so you know, through the end of the year, you can defer them, where half would be due in 2020, and the other half would be due in 2021. So just be aware that you’ve got that ability to defer those payroll taxes, and you don’t have to apply for it, you don’t have to be eligible. Every business is eligible to do that. And what it does, it saves you cash. You still have to pay it eventually, but you can hold onto the money for a little bit longer. And who knows, Jon? You might need that money. And the government’s not charging any interest on it either. So it’s kind of like an interest free loan on your employer’s portion of payroll taxes. So just keep that in mind. That’s number one.
Number two, there’s something called the Employee Retention Tax Credit. If you have been significantly affected by the Coronavirus, to the point where your revenues are 50% or more less quarter by quarter than they were this time last year, then you’re entitled to a tax credit. And the credit is up to $5000 per employee per quarter. It’s 50% of their wages up to $10,000. And you could take that credit right against your employer taxes on your 941 tax return. And if your credit is higher than the actual payroll taxes you owe, you can get the cash back from the government. So if you’ve been really affected by COVID, you should be talking to your accountant and your payroll service provider, and putting in for that Employer Retention Tax Credit. If you participated in the Paycheck Protection Program, you won’t be eligible to get it. But if you didn’t, then you are. So that’s the second point.
And then deferred tax credit that I want people to know about, has to do with the Emergency Family Medical Leave Act, which means that if your employees had to leave, take time off because they or a family member were affected by COVID, you have to continue to pay their wages. However, there is a tax credit available based on the wages that you’re paying those employees. You can’t take that credit until after the year is over. So you’re putting the money out, and then you’re waiting to get it back in 2021. But it’s another big tax credit that’s available.
So defer your taxes if you want to. You don’t need to do anything, but basically not pay that. Just remember, you’re going to have to pay them at some point. Number two, think about the employee retention tax credit, if you’ve been really affected by COVID, and you’re not participating in the Paycheck Protection Program. And if you have employees that took time off under the Emergency Family Medical Leave Act, don’t forget, you can get a credit for their wages in 2021 against your 2020 taxes. How does all that sound, Jon?
Jon: That’s a lot, but it sounds good. And when you’re talking about leave, you’re really talking about the national move that was done with the Families First, right?
Gene: That’s exactly right. So that happened, it was back in March, and what the Cares Act allowed. It was actually, I think separate from the Cares Act.
Jon: It was a Families First Response, but the very first one, right?
Gene: Exactly right. And it basically says if you’ve got employees that are working for you, that either are affected by COVID, sick with it, test positive, or affected because they have close family members that have been affected, and they have to take time off, the law is you have to give them the time off and you’ve got to pay them for it. So a lot of employers are like, “Oh my God, I can’t believe I have to do that.” And by the way, it’s regardless of size. It doesn’t matter how big your business or small your business is. But at least there’s a tax credit that you can claim in the future for the payments that you made.
Jon: Oh, I thought there were some business size parameters on that first one that were amended. But you know what? What’s interesting is we have a team at The Hartford who specializes in absence management. So what we can do too, is leave a link in the show notes for this episode. And one of the really cool things they do is they have an entire National Leave Resource Center. So you can go in and find some impact statements from specialized attorneys on what that might mean for you, learn what it does at a state level if you’re an employer, or just someone who’s curious. So we can leave a link for that too, because there’s some really good information out there that’s probably easier for you to read than for me to recite, to make sure you’re getting it accurately.
Gene: And you’re calling it absence management? I love that.
Jon: Yeah. So aside from small business insurance, we have other products here at The Hartford, and one of them is employee benefits. And a large part of that is leave management and absence management. And so if you need a supplemental health product, or if somebody gets injured on their own, things like life insurance and disability and accidental injury, that’s a whole nother division. So they really focus on helping businesses find the products that set them up to help people get healthy and back to work and productive faster, and then also help take care of them while they’re out.
So it’s an interesting pseudo-health space, but a lot of what they do is really help guide on the changing legislation, because I think a lot of that started last year, ramped up so quickly and so dynamically as a result of COVID. So there’s a lot of current information there that might be helpful to some of you.
commercial anno…: This podcast is brought to you by The Hartford. When the unexpected strikes, The Hartford strikes back, for over one million small business customers, with property, liability, and workers’ compensation insurance. Check out The Hartford small business insurance at TheHartford.com.
Jon: I think back to taxes, and given everyone’s in a unique situation, every state’s probably a different category, but are there any moves that a business owner might want to consider making in 2020 to minimize some of these liabilities, or make sure they’re eligible for some of these credits?
Gene: Yeah. First of all, I mean, I do want to say, Jon, a lot of attention has been given, and rightly so, to the so many business owners in this country that have really been suffering through the pandemic, and particularly people in the restaurant retail industry. But let’s not forget that there are a lot of businesses in this country that have actually been keeping it together. Some that have actually been doing okay. I mean, there are certain industries, I mean, eCommerce sales are up 20% this year, and certain industries, groceries and deliveries and cleaning products and healthcare. I now have a lot of clients that have been having a pretty decent year. And then there’s other companies that are essential businesses. So it’s been very disruptive. They’ve had to send people home to work, but they’re still working away.
And the reason why I bring that up is because there’s a lot of companies that their tax planning is still super important this year. You know what I mean? You really want to try and minimize what your tax liability is. It’s cash that’s going out of your pocket. So yes, there is certain things that you can be doing. And let me just mention a few things that you want to talk to your accountant about.
Number one is, there is still this great deduction for buying capital equipment. It’s called the Section 179 Deduction. You can buy computers, furniture, equipment for your business. And if you buy it, you can deduct up to a million dollars in your first year. It depends if you’re eligible and most small businesses are. But you could take an immediate deduction for a capital equipment purchase. And what’s really telling is that, because interest rates are so low, getting loans right now are very attractive.
And if you finance your capital equipment purchases, you can finance the purchase, and as long as you put the equipment into service before the end of the year, you get the full deduction, and you haven’t even paid for it yet because you financed it. So that’s a real important thing to keep in mind is making investments in capital equipment. And by the way, Jon, with the way the economy has been, there’s been some companies that have really been distressed, and there’s a lot of capital equipment deals that are out there right now on auction sites and used equipment sites. And it’s a good time if you’ve got the wherewithal to snap up some deals, finance it, and take a big tax deduction for it at the same time. So that’s one piece of advice that I have for you.
The second piece of advice that I have for a lot of business owners is to try and continue to sock away as much as we can for retirement. If you have a 401k plan or a pension plan, if you are a very small company, maybe just you and one other person, or you and your spouse for example, or partner, I have a lot of clients that are looking into Cash Balance Defined Benefit Plans, which means it’s a very small plan that you can set up, but you can deduct, you could put away potentially hundreds of thousands of dollars tax-free, as long as you set the parameters of the plan in a certain way and get it set up correctly.
So if you are looking to put money away for retirement that you don’t think you’ll be using for another 10 or 20 years, and you’ve got a very, very small business, a huge tax advantage way to try and do that is what’s called a Cash Balance Defined Benefit Plan. Talk to your tax advisor and talk to your retirement plan advisor. It’s another potential option for you.
And third has to do with just research and development. If you are doing research and development, the R&D tax credit, it’s been designed to be easier to apply for. A lot of businesses don’t go to the effort to applying for the R&D tax credit. I think you’re missing out on a lot of money. If you’re working on new products or new product designs, or upgrading your products, all of that can qualify, your payroll, your materials, any outside contracting costs. And if you think it’s too complicated, just Google R&D tax credit consultants, and you’ll find plenty of people out there that do this work on a boutique basis, and they can help you put together the application and you could be saving some big, big money.
So the accelerated depreciation under Section 179, the deduction that you can take, if you buy capital equipment, that’s one. Stocking away money in your retirement plans, always a great move to make. But consider the Cash Balance Defined Benefit Plan. And also, check out the R&D tax credit if you are putting money into new product designs and upgrading products, and researching new products. Could be a big credit that you could use to offset your taxes.
Jon: You know, Gene, I mean, quickly, because the R&D thing, that’s really interesting. Because I feel like one of the things I’m continually inspired and really impressed by over the past couple months has just been seeing how people brought their businesses and services to bear in completely new ways that are just very unexpected, because you think of small businesses as being these hearts and souls of the communities, and these gathering spaces, and everything from gyms to restaurants, just thinking of different ways to get things out there, even libraries or galleries or nonprofits. Do you feel like some of those digital activations that these traditionally in-person businesses have had to make would fall under that? Or is it really more for technical product development versus service alterations?
Gene: Such a great question. So I’ll answer your question in reverse. No. It’s not for these traditional tech companies. People think like, “Oh, the R&D tax credit is for people doing software development, or they’re in the pharmaceutical business. And so my little company wouldn’t qualify.” Absolutely not correct.
So Jon, the point that you bring up is so true. If you are yourself redesigning a product, or thinking of offering a new product line, and to do that you’ve got to put some investment into that product line, and that is testing, hiring outside consultants, having your employees spend time putting up whatever work they’ve got to do to design and create any kind of new product lines.
A perfect example, I have one client that’s actually, they’re in the Bronx, and before they made t-shirts or promotional items for companies. And when all of this stuff was going down, they pivoted a little bit and started making personal protective equipment. Well they had to do stuff to their machines. They have to hire additional people. They needed some consulting help to do it. They had to get some materials. They had some testing. And we’ve been working with them to try and quantify those costs that they incurred for this whole new product line, because those costs are eligible to go onto the calculation for the R&D tax credit.
So you’re absolutely right. It’s not just what you think it is, this traditional pharmaceutical or tech companies that can take advantage of it. It could be anybody that’s pivoting and innovating and trying new things, particularly in the wake of the pandemic.
Jon: Awesome. Yeah. So I mean, it’s worth an online search for sure.
Gene: It is.
Jon: It can help you accelerate your innovation agenda, and maybe save some dollars this year. So I think those are all great things to keep in mind. And then I think, people are starting to think about their end-of-year and fiscal planning now. So hopefully everyone out there found this information helpful.
So with that, I think we will wrap up this edition of a Small Biz Ahead. And thank you, Gene, again for the great insight and advice. And thank you everyone for listening, and we’ll catch you on the next one.
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Very informative. Thank you so much. Please continue to educate us on more items that would help us in our tax preparation.
Thank you for commenting, Rebecca! We can definitely work on creating more articles around taxes for the future.