2020 has been tough for nearly every business amidst the COVID pandemic, fortunately, through the CARES Act, there has been a few provisions to try to help businesses with their tax liabilities during this time. These provisions along with a few other items, are things to keep in mind when it comes to tax planning for your business this year.
Current Losses for Refunds
Under the CARES Act, businesses are allowed to use their current losses against prior year income for quick refunds. Net operating losses from years 2018-2020 are allowed to be carried back up to 5 years against previous income in order to obtain prior year refunds. If this route is chosen, a tentative refund claim will need to be filed by Dec. 31, 2020 for 2019 taxes. Furthermore, if you are expecting losses in 2020 that you want to carry back, filing your taxes early would be recommended, as you can’t claim the carryback refund until your taxes are filed.
Businesses are allowed to claim losses if they are deemed attributable to a disaster on a prior year tax return. Due to the pandemic this year, the entire US has been declared a disaster area, so most every US business could potentially be eligible to claim refunds from COVID related losses. These losses range from business closures to loss of inventory, the loss just must be caused by or related to COVID. If this is the case, these losses in 2020 may be claimed on a 2019 amended return for a potential refund.
Payroll Tax Payment Deferral
The CARES Act leaves the option for employers to defer paying their share of Social Security taxes for 2020, making half due Dec. 31, 2021, and the other half due the following December 31st. This could provide liquidity relief for businesses that need it. However, paying the taxes in 2020 may allow the business to take advantage of the benefits discussed earlier due to a resulting increased net operating loss. This is something to keep in mind as your close your books since there are benefits with either making the payment or deferring it. The payroll tax deferral may be used with PPP funded payroll up until the date the lender declares forgiveness.