Small Business Taxes in 2020: COVID-19 Federal Tax Relief

Female business owner on the phone while preparing 2020 business tax filing

The holiday season has come and gone and tax season is close on its heels. While you focus on rebuilding your business for the new year and the “new normal”, getting your annual tax return ready can easily slip to the bottom of your to-do list. Starting your tax return as early as possible in the new year can help you get ahead of the curve in Q1, especially if you plan to apply for funding to help kickstart your recovery.

Tax laws change regularly, and there are new deductions available in 2021 to help businesses that have been impacted by the COVID-19 pandemic.

There are two important pieces of legislation for small businesses in the United States to be aware of when filing their 2020 tax return:

  1. Families First Coronavirus Response Act (FFCRA): This Act requires that certain small- and mid-sized businesses provide employees with paid sick leave and expanded family leave should they or a family member become ill with coronavirus. The Act includes a refundable tax credit for any COVID-19-related sick and/or family leave.
  2. Coronavirus Aid, Relief, and Economic Security Act (CARES): In addition to popular programs like the Paycheck Protection Program, the CARES Act also includes the Employee Retention credit for certain employers.

Let’s take a closer look at how each of these two Acts will affect your 2020 tax filing.

Families First Coronavirus Response Act (FFCRA)

The FFCRA provides businesses with tax credits to cover part of the cost of providing employees with paid sick leave and extended family and medical leave for reasons relating to COVID-19. How much you can claim as a credit depends on why an employee who took leave was required to quarantine, and can be applied to expenses incurred between April 1 and December 31, 2020.

The credit can be claimed on federal employment tax returns, but employers may benefit more quickly by using the credit to reduce their federal employment tax deposits. If there are insufficient federal employment taxes available to cover the amount of the credits owed, an eligible employer can request an advance payment from the IRS by submitting Form 7200.

To claim this tax credit, you must retain records and documentation related to and supporting each employee’s leave, plus Form 941 (Employer’s Quarterly Federal Tax Return) and Form 7200 (Advance Payment of Employer Credits Due to COVID-19).

Coronavirus Aid, Relief, and Economic Security Act (CARES)

In addition to relief programs like the Paycheck Protection Program, the CARES act also included two tax programs for employers:

  • The Employee Retention Tax Credit
  • Employer tax deferrals

Employee Retention Tax Credit

The Employee Retention Tax Credit encourages businesses to keep employees on the payroll during COVID-19 related closures or reductions in service

The credit covers 50% of qualified wages up to $10,000 for a maximum refund per employee of $5,000 for the year 2020. The total amount you can claim under the Employee Retention Tax Credit depends on the size of your business.

The Employee Retention Tax Credit is available to:

  • Businesses that were fully or partially suspended in 2020 by government order due to COVID-19
  • Businesses that experienced a significant decline in gross receipts—specifically, if their gross receipts for a quarter were less than 50% compared the same quarter in 2019

The credit is not available to self-employed individuals or local, state, or government employers. It’s also not available to businesses who received a PPP loan.

For immediate benefits, the Employee Retention Tax Credit can be claimed against payroll tax deposits that are otherwise required to be paid. If the credit available exceeds the deposits owed, employers can file Form 7200.

Employer tax deferrals

The CARES act also includes employer tax deferrals to help businesses cover the cost of paying Social Security taxes. While not a tax credit, the employer tax deferrals included in the CARES act allow employers to defer payment of Social Security taxes on employee wages without penalty for wages paid from March 27 to December 31, 2020.

All employers, including self-employed individuals, are eligible for this tax deferral program.

Find out what credits you’re eligible for

A new round of PPP funding and financial relief for businesses impacted by the COVID-19 pandemic was announced at the end of December, 2020.

These new relief measures also include changes to tax filings for small businesses who received PPP, EIDL, or other disaster funding in 2020. Prior to the new stimulus package, businesses could not deduct expenses paid for using PPP funding because the funding is forgiveable and not taxable income. Under the new legislation, PPP loans and EIDL grants will not be taxed. If you used PPP or EIDL grant funding to pay businesses expenses that are normally deductible, you can now claim those deductions as you normally would.

Tax Credits for Canadian Businesses

There are currently no tax credits or refunds available to small businesses operating in Canada, but there are some tax changes related to relief programs that Canadian small business owners should be aware of:

  • Canada Emergency Wage Subsidy (CEWS): Employers who experience a drop in revenue as a result of COVID-19 may be eligible for a subsidy to cover part of their employees’ wages. CEWS income is taxable, and must be reported on your Annual Return of Income when calculating taxable income.
  • Canada Emergency Rent Subsidy (CERS): CERS is available to Canadian businesses, non-profit organizations, and charities who have seen a drop in revenue due to COVID-19 to cover their commercial rent or property expenses. Like CEWS, CERS income is taxable and must be reported on your Annual Return of Income when calculating taxable income.

Employers are also responsible for additional reporting on T4 Statement of Remuneration Paid forms for the 2020 tax year. Additional reporting applies to all employers (not just employers who accessed COVID-19 relief programs) to help the Canada Revenue Agency validate payments made under CEWS and other benefits.

Getting Your Business On the Road to Recovery

Many small business lenders require you to submit detailed tax documentation and other financial records when you apply for funding. If you intend to apply for funding from the SBA, commercial lenders, or alternative lenders in 2021, preparing and filing your 2020 tax return as early as possible will put you in a stronger position and may positively influence your chance of approval.

The SBA and commercial lenders will require up-to-date tax documentation, as well as detailed tax documentation from previous years. Alternative lenders have more flexible approval requirements and may not require detailed tax documentation depending on your business’s overall health, as well as the type of funding and the amount you are applying for.

Preparing your 2020 tax filing can also help you gain a better understanding of your business’s current financial status, which can in turn help you create a realistic plan for how you’ll recover and continue to grow in 2021. Alternative funding from direct online lenders like Greenbox Capital® can help you access the working capital you need to achieve your long- and short-term goals. With loans as small as $3,000 up to $500,000 alternative lenders offer a number of advantages over traditional lenders like banks and SBA loans, including:

  • Easier qualification criteria with less paperwork to gather
  • Faster review and approvals, with approval in as little as 2-5 business hours and funding in a little as 1 business day
  • No restrictions on how your funds are used—use them for payroll, everyday operating expenses, or to kickstart new ideas
  • A variety of funding options are available to suit your business’s needs, including merchant cash advances, small business loans, invoice factoring, collateral loans, and business lines of credit
  • Businesses with low credit can receive funding. Instead of focusing on your credit score, our Funding Advisors will review the overall health and potential of your business
  • Businesses in high-risk industries can also receive funding
Learn more about alternative funding
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