Business Owners are Dreading the 2020 Tax Season: What to Know
The COVID-19 pandemic sent the world into a tailspin that countries and individuals are still reeling from and trying to endure.
For businesses, especially, staying afloat has been a monumental task — some smaller businesses have had to close their doors permanently. With the new year approaching soon, another tax season is on its way.
The 2020 tax season is not going to be like any other for businesses. The pandemic has caused economic devastation on all levels. Many business owners and leaders will be looking for the best way to do their taxes in a way that helps their company after a stressful year.
According to a study from LendingTree, 54% of respondents are dreading doing their 2020 taxes. Moreover, four out of 10 respondents depend on a tax refund this upcoming season. With such turmoil over taxes, getting a head start now will alleviate some of this stress and help business owners get the right tax refunds they’re relying on.
COVID-19’s Effects on Businesses
Businesses across the world have had to adjust to the changing state of the pandemic constantly. When spikes occur and bring more cases and hospitalizations, businesses of all kinds must tone down in-person shopping. For some companies, this necessary step can also be detrimental to sales.
In the United States, around 100,000 businesses have shut down permanently after being unable to survive the harsh conditions and demands brought by the pandemic. Additionally, the unemployment rate in the U.S. is still coming down from April’s 14.7%, an all-time historical high. People who no longer have businesses or jobs are going to need financial assistance with their taxes.
However, average businesses that are still working or struggling will need help as well. The pandemic is likely here to stay throughout 2021. It’s important for companies of all sizes and all industries to handle their taxes as soon as possible because the coming year may see similar taxation.
What to Know About Taxes
With the coronavirus adding stress to a typically stressful situation, business owners should organize and create a plan to stay ahead. The following steps will be invaluable as resources and as a way to understand 2020 taxes better.
The first step is knowing the business’s financial state — the losses, profits, and every other detail that has happened this past year. Depending on the fluctuation of revenue, businesses could end up paying more or less in taxes.
1. Address PPP Loans
If a business applied for a Paycheck Protection Program (PPP) loan, they could now focus on the forgiveness of that loan. This program closed on August 8, 2020 — and anyone who applied and received a loan before then is now eligible. The Small Business Association (SBA) recently changed its policy on forgiveness, too.
Businesses can apply for PPP loan forgiveness at any point up until the date of maturity of the loan. They can also apply when they have used all the funds from the loan — which businesses can use for payroll, mortgage, rent and utilities — during the 8- or 24-week period after the loan went out.
2. Get Refunds From Losses
For more immediate assistance, businesses can examine their revenue losses. The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted by Congress on March 27, 2020, dictates that businesses can use current losses as taxable trusts. This provision ended several years ago, but with the pandemic, Congress brought it back.
This step will be invaluable for almost all businesses that have lost revenue in the past year. They can carry back these refunds from their taxes spanning back to 2018 and 2019, then again for 2020. With this kind of assistance, tax season can end up giving back to a company.
3. Review Payment Plans
A payment plan is a key way to organize the business and get on track for tax season. It helps owners understand how much they need to pay for the 2020 tax season. They need to know if they’ll need to take out, when to pay back, and how much revenue they need to make.
With the CARES Act specifically, a business owner can defer paying a portion of their Social Security tax for 2020. They’d be able to put aside 6.2% of the tax and pay half by 2021 and the other half by 2022.
This flexibility gives leaders more time to properly get back on track after the pandemic.
4. Dip Into the Retirement Fund
This step will be mostly a last resort for business owners and employees. Financial and taxation experts will most commonly advise against taking funds out of a retirement account like a 401(k) or an IRA. However, the CARES Act waives penalties that this action would normally accrue — if it’s for a COVID-19-related matter.
The IRS is typically strict about retirement funds. Before someone turns 59 and a half, the federal agency will penalize them for taking funds out. With the urgency surrounding the economy and business needs, this step could be a way to stay afloat now more than ever.
5. Pay Estimated Taxes
When the date finally comes — or before then, if businesses are looking to stay ahead of the curve — everyone will need to pay their taxes. Paying late will accrue fees and fines, which is why using these steps to organize is imperative. Businesses aren’t alone, though. Plenty of online resources can help.
Most importantly, to get the correct amount of taxes that a company will owe, the owner can use online calculators for assistance. They’ll need to make sure they understand what the IRS considers taxable as income, as well as what their intangible assets include, like technology or contracts.
It’s important to keep in mind that, to avoid penalties, businesses that made $150,000 or less can pay either 90% of what they owe by the tax filing deadline in 2021 or 100% of 2020’s payment. Whichever is less expensive is typically the option taxpayers go with. Then, they’ll need to focus on the following resources to get even more aid.
Help and Relief
When it comes to tax and business relief, leaders have several options for help. Some of these methods are standard for any tax year, and others are newer and came about in response to the pandemic. It’s critical to understand which ones to apply for during this time of strife.
1. Charitable Deductions
Businesses and organizations can often qualify to get tax deductions from their charitable donations or contributions. Typically, companies can get tax deductions for charity work. With the pandemic, they can now get a special benefit.
The IRS is now allowing for up to $300 in tax deductions for each company that contributes in cash to charities. Thanks to the CARES Act changes, this unique offer allows struggling businesses to get some relief during the upcoming tax season.
2. Unemployment Tax
Though unemployment benefits and paychecks have helped countless Americans stay afloat during the pandemic, individuals and employees will have to pay taxes on these as well. The IRS considers unemployment to be taxable income.
The current rate for taxing is 0.6% of the first $7,000 that a former employee or individual receives. Additionally, the $600 per month from the government is also taxable.
3. Retention Credit
For any business that the pandemic has impacted financially. The IRS is allowing a broad timeframe for employees to get refundable tax credits. From March 12, 2020, to January 1, 2021, employers can apply for this credit.
It ultimately reduces the standard tax deposits. The refundable tax credit level is equal to 50% of the qualified wages that the employer pays to employees between those dates.
4. Paid Leave
Paid leave has been a growing necessity within the United States and throughout the world. Employees must take time off not only if they contract the virus but also if they must care for someone close to them.
The Families First Coronavirus Response Act gives funding to businesses with 500 employees or fewer. Specifically, this Act’s funding will go towards employee paid leave. It is then eligible for tax credits.
5. Freelance Workers
Self-employed and freelance workers often find themselves in unique situations when it comes to tax season. That uniqueness will continue for the 2020 tax deadlines. One area that these kinds of workers should focus on is tax-deductible items and services.
While working from home, they can consider things like office supplies, transportation and power for tax deductions. It’s important to keep in mind that these deductions only apply to freelancers and self-employed workers — they are not for standard businesses and workers.
6. Online Resources
Countless online resources, both from the IRS and third-party sites, can help businesses of all sizes. First and foremost, tax calculators are invaluable for getting the right estimates. TurboTax offers an ideal calculator, and owners can also use the IRS to calculate withholdings for the upcoming year.
The IRS has plenty of resources for other areas of interest as well, like small business relief and loans, knowing how to file taxes, tips for independent contractors and closing a business if necessary.
This tax season will be difficult for many. But with the right resources and tips, businesses can work their way through it and build a better future.
The Right Way to Do Taxes
The end of the pandemic will most likely take the form of a slow fade out. Once vaccines begin to become widely available to the public, the virus can begin to dissipate. However, without a timeline, businesses still must do everything they can to weather the pandemic.
Using these tips and resources is the best way to approach the 2020 tax season. Getting a head start is now necessary for the best organization and tax deductions. The time is now to tackle taxes.