Tax time can be tricky, particularly for business owners. The combination of changing tax laws and the unchartered territory of COVID-19 relief programs creates added complexity for 2020 tax filing. With more than 20 years of experience in managing operations and business finances, I focus on helping other business owners achieve financial stability and future readiness. To help for this year’s tax season, I’m sharing answers to the most common tax questions that I’m hearing from small business owners right now.
What do I need to file taxes for my small business?
As a small business owner, the most important action you can take to be ready for tax time is to maintain accurate financial records. You must have a record of all income, cost of goods sold, expenses, fixed assets and loans relevant to the current tax year. Accuracy and detail are key. Working with a qualified bookkeeper or accountant trained to categorize and track this information in alignment with tax laws can make tax time a breeze.
Am I eligible for a home office deduction?
Many small business owners found themselves transitioning from a brick-and-mortar to a home office due to COVID-19. Business use of your home is tax deductible if you meet the IRS requirements. For example, you must demonstrate dedicated home office space that is used as your principal place of business. Storage of inventory may qualify for a deduction, too. Your tax accountant can help you determine if you qualify and the best method for taking advantage of the home office deduction.
Is Paycheck Protection Program (PPP) money taxable?
Business owners who leveraged PPP during 2020 can breathe a sigh of relief as the forgiven loans will not be taxed by the federal government. The CARES Act specifies any forgiven loan amount is not included in taxable income. Additionally, companies awaiting confirmation of loan forgiveness do not pay taxes on PPP funds if the company reasonably expects to receive forgiveness of their PPP loan. Whether a borrower’s forgiven loan is taxable at the state level depends upon the state. Business owners should check with states where the company files income tax to determine if the state followed federal guidelines or enacted its own ruling.
Are expenses paid with PPP funds tax deductible?
Yes, eligible expenses paid with PPP loans are tax deductible. Initially, the IRS stated that expenses would not be tax deductible, but Congress reversed the decision. The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. The bottom line is that the federal government allows full deductibility for expenses paid with forgiven PPP loans. Many states are still determining the treatment of PPP monies. Talk with your tax advisor about how the treatment of PPP forgiven loans will impact you and your business for state income tax purposes.
My business received state or another form of relief funding. Is it taxable income?
The pandemic prompted a plethora of organizations, as well as state and local governments, to offer grant funding to small- and mid-sized businesses to alleviate the financial strain caused by COVID-19. The grant funding received may not have to be repaid, but often, the money is considered taxable income. Check with the granting agency and relevant government tax agencies to obtain clarification on whether the money is classified as taxable income by the state or federal government.
My business lost money during 2020. Is there a tax break?
Businesses that incur more expenses than income during the tax year experience a Net Operating Loss (NOL). In prior years, the IRS forced companies to carry forward the NOLs. Additionally, losses could only offset 80% of the taxable income. The CARES Act removed the existing limitations on NOLs. Thus, if your company lost money during 2020, your business may be able to receive money back sooner than it would have pre-pandemic. Because complex rules govern NOLs, it’s a good idea to consult a tax professional to understand how NOLs impact your specific tax situation.
Amanda Prill is the owner of Added Impact Consulting. She served as the CEO for a start-up government contracting firm that grew to almost $4M in 3.5 years. This unique perspective allows Amanda to see red flags within an organization’s finances and add more perspective than the typical bookkeeper. She holds a Master of Business Administration (MBA) and has 20 years of experience in managing small businesses, operations and business finances. When not in her office, you can find Amanda cycling, soaking up the sunshine, crafting or golfing with her husband.