Businesses would do well to start their tax preparation as early as possible, given the complexity of last year’s finances for many businesses. (Photo: Shutterstock)Of all the measures taken by the Federal government to address the economic impact of the COVID-19 pandemic, the Paycheck Protection Program (PPP) probably received the most attention. With many small businesses forced to shut their doors—at least temporarily—millions of employees were left without a source of income. The domino effect of this collapse threatened to trigger the most severe economic downturn since the Great Depression; a prospect that, sadly, came to fruition.
Challenges on top of challenges
The PPP disbursements were intended to inject the economy with cash to mitigate the worst effects of these closures, essentially substituting cash infusions from the government for the lost revenue. As the name of the program suggested, that money was intended chiefly to cover or replace the wages of affected workers.
Related: New PPP loans: Questions and answers
Now, this highly unusual cash transfer must be accounted for in the tax filings of all the businesses that signed on. Given the speed and scope of implementing the PPP—and the many changes the terms of the program underwent—it should not be surprising that there is no playbook to follow for filing the related taxes.
Be forewarned, this piece is not intended to serve as tax advice; always consult with a tax professional when filing your returns. However, with regulations governing the program initially being developed “on the fly” and frequently being revised, below are some interesting and significant features of the tax implications.
This perspective comes from work inside a professional employer organization (PEO) that handles payroll and HR for thousands of small and medium businesses. Some of these businesses’ situations are unique. But there are also a range of common considerations that might relate to your business.
Credit where it’s due
Even though PPP funds were intended to offset lost revenue, that money is not being characterized as revenue from a tax standpoint. It was distributed as a loan, with many companies then able to obtain forgiveness of the loan. Regardless of whether you received loan forgiveness or expect to, the money does not count as revenue.
Nonetheless, you can still claim the Employee Retention Tax Credit (ERTC) and apply that to your filing even if you received PPP money. However, some earnings are NOT allowed:
While this is a valuable tool to inject much-needed cash back into your business, especially since you can apply the credit retroactively for 2020, it is important to understand that the tax credit received will reduce the tax-deductibility of those wages as a business expense. For example, if you have $22,000 in wages paid and receive an ERTC credit of $15,000 the difference of $7,000 is what you may claim as a tax-deductible expense. Again, it’s always best to consult with your tax professional to assure you’re getting all eligible deductions.
In addition to the PPP funds, some companies took advantage of a voluntary Social Security tax deferral, which was intended to leave more money in the economy. That program—part of the Coronavirus, Aid, Relief and Economic Security (CARES) Act—Involved a moratorium on withholding payments to the government by the employer. The deferral period expired at the end of 2020. However, the tax liability for that money was not waived, simply deferred. So, the money was and is still owed.
If you are one of the participating companies, you will not only want to consult with your tax professional but may also want some cash management advice on how you can come current on that account.
Silver lining
Entertainment venues and similar businesses that had to close due to the pandemic may be eligible for a Shuttered Venue Operators grant. The program was included in the last round of relief, so—if you operate such a business—you may be eligible so long as you do not obtain a PPP Loan. But in order to be eligible for the grant, you will need to have documentation of the financial impact to your business in 2020 to support an application. That may be something you will want to pull together as you prepare your tax filing for last year.
Another change to employment funding in the relief measures was an update in the payment methods allowed under Section 127 of the tax code and its extension through December 31, 2025. If you don’t know about this benefit, you should. Section 127 allows companies to help pay down their employees’ student loan debt. This is a significant benefit for employees that pays down their debt while avoiding tax implications. With the increased payment types, businesses will undoubtedly want to investigate this powerful tool for attracting and retaining new talent.
This only scratches the surface of the many aspects of coronavirus economic relief packages. The US Treasury Department has a wealth of information that you’ll want to review.
Because of all the programs implemented at the federal level in response to the pandemic and the ongoing revisions to the terms of those programs, it is likely your tax professional will have to do considerably more research than usual to understand how the regulations apply to your business. For this reason, businesses would do well to start their tax preparation as early as possible. In fact, given the complexity of last year’s finances for many businesses, owners should be prepared to involve the services of an attorney.
A great free source of business advice are Small Business Development Centers, a service of the Small Business Administration that often also draws on the resources of local universities. An initial consultation with your nearest SBDC might help you uncover potential opportunities to minimize your tax liability and avoid filing mistakes.
Looking ahead
Ordinarily, tax season can be a time of reflection on how a business performed and what can be improved moving forward. 2020 was such an unusual year, you might think (or hope) the lessons will never need to be applied again. But we are not yet through the pandemic. What we’ve learned regarding essential business needs is a good lesson, pandemic or otherwise.
Certainly, those are lessons we will want to draw on as we begin to rebuild—both our businesses and the lives of the employees who have suffered the brunt of the downturn. At a minimum, you may want to look at how payrolls and benefits are managed in this new economic environment.
John McFarland is CPSVP of client development at Vensure Employer Services.
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