With the government shutdowns and economic fallout from the pandemic, 2020 was a rough year for many businesses. But thanks to recent legislation aimed at helping business owners recover, you could see a silver lining in the form of significant tax-saving opportunities when you file your annual tax return this spring. First up, although it's technically not a tax break, the IRS announced this week that the deadline for filing federal income taxes has been pushed back from April 15 to May 17, 2021, which should give you some extra time to get your personal tax returns handled.
The tax filing postponement applies to individual taxpayers, including those who pay self-employment taxes. However, the extension does not apply to first-quarter 2021 estimated tax payments, which many small business owners file. This means your Q1 2021 estimated tax payments are still due April 15, 2021.
Next, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed last March, and in addition to emergency loans like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL), it also included several tax breaks to help struggling businesses, most notably, the Employee Retention Credit (ERC). From there, the Consolidated Appropriations Act 2021 passed in December 2020, expanded and extended the ERC program to address the lingering effects of the pandemic.
Finally, in addition to the pandemic-related legislation, multiple provisions of the 2017 Tax Cuts and Jobs Act (TCJA) continue to provide potentially hefty reductions to your tax bill. Last week, in part one of this series, we outlined the first two big tax breaks you should be aware of when filing your 2020 return, and here we've highlighted the remaining three.
3. Increase Your Business Interest Deduction
Under the CARES Act, the allowable business interest expense deduction for 2019 and 2020 was increased from 30% to 50% of your adjusted taxable income (ATI). Any business interest expense that isn't allowed as a deduction for this year is carried forward to the following year.
In addition, for 2020 you can apply the 50% deduction limit based on your 2019 ATI. This change should increase the interest expense deduction for your business, since the vast majority of companies will have more taxable income in 2019 than 2020 due to COVID-19.
4. Carry Back Recent Losses For Up To Five Years
The economic turmoil caused by the pandemic will cause many small businesses to incur net operating losses (NOLs) for 2020. However, due to a provision in the CARES Act, you may be able to apply a NOL generated in 2020 to income from the past five years for a potential immediate tax refund.
Under the Cares Act, if your business had an NOL in 2018, 2019, or 2020, you can now carry back the NOL for up to five years in order to recover taxes paid in those earlier years. For example, if you have an NOL in 2020, that loss can be carried back to 2015.
Such NOL carrybacks allow you to claim refunds for taxes paid in the carryback years. And because tax rates were significantly higher before the TCJA went into effect in 2018, NOLs carried back to those years can result in big refunds. If you have available NOLs, you can obtain your refund immediately by filing amended returns for the applicable years.
5. PPP Loans and Business Expense Deductions
Previously, the IRS had ruled that you could not deduct your wages and other qualifying business expenses that you used your PPP funds on if your PPP loan was forgiven—which effectively created a tax on the loan. But the Consolidated Appropriations Act 2021 clarified that forgiven PPP loans will not be taxable to business owners.
This applies to all existing PPP loans under the original rounds of funding as well as the new second-draw PPP loans. This means you can have your PPP loan forgiven and still be able to deduct your payroll and other qualifying business expenses paid with your PPP money.
SBA is currently offering PPP loans until March 31, 2021. However, just this week the House of Representatives voted to extend the PPP program for two additional months. This would extend the program's deadline to May 31st 2021, instead of March 31, and give the Small Business Administration (SBA) an additional 30 days to process loans. The bill goes to the Senate next, where it's expected to be approved with bipartisan support.
For eligibility information on both the original and new PPP loans, read our previous post, New COVID Stimulus Funding Available For Business Owners in 2021. Additional information on the PPP program can also be found on the SBA's PPP website.
Maximize Your Tax Savings For 2020
In addition to the tax breaks highlighted here, there are numerous other potential tax-saving opportunities available under the pandemic-related legislation and TCJA. So even if you don't qualify for any of these, it's likely that there are others you can benefit from. Meet with us, as your Family Business Lawyer™, to make sure you don't miss a single one. Schedule your appointment today.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.