Three Important Ways the Pandemic Could Put Cash Back in Your Pocket

While the pandemic wreaked havoc on many businesses, there are important tax credits available that could put cash back in your pocket. With the 2020 tax season in full swing, you ideally have a trusted accountant to prepare your taxes; however, as a business owner it’s your signature on the line and ultimately your responsibility.  Be sure that you are familiar with these credits so you can discuss them with your tax accountant.

Net Operating Loss Carrybacks

If your company lost money in 2020, you have a one year only chance to carryback this loss for up to five years.  NOLs, as we call them in the accounting world, are not new, but they were all but eliminated with the 2017 tax reform act.  Just like the McRib, they are back for a limited time only.  But wait, that’s not all! The 2020 CARES Act allows you to carryback losses that you had in 2019 and 2018 as well.

Why is this important? Being able to carryback losses to years in which you made a profit reduces the profit and lowers your tax liability for those years. You may be owed a refund!  That is cash money back in your pocket. File your 2020 taxes first and then amend prior years for which the NOL is applicable. You can find more info about NOL Carrybacks here.

Employee Retention Tax Credit

This is an enormous tax benefit, but it is also complicated.  The ERTC is taken against the employer’s share of Social Security payroll taxes based on qualified wages paid after March 12, 2020, and before January 1, 2021. If the credit available to your business is higher than the taxes owed, the credit is refundable which means more cash back in your pocket.

There are two ways to qualify. You are eligible if your business operations were fully or partially shut down due to orders from a governmental authority that limited commerce, travel or group meetings as related to the pandemic. You are also eligible if your business remained open but suffered more than a 50% loss in revenue in a quarter as compared to the same quarter in 2019.  Look at eligibility beginning with the first calendar quarter in which you experienced the 50% decline in revenue.  From that quarter move on to subsequent quarters until you reach a quarter in which your 2020 gross receipts are greater than 80% of the same quarter in 2019.  Remember I said it was complicated? Anyone seeing how important it is to keep good financial records throughout the year? Yep, me too.

You take the credit on your payroll returns for the quarter(s) in which you meet the eligibility requirements. The calculation to determine the credit is up to 50% of each employee’s compensation for the eligible quarter, up to $10,000 of qualifying wages paid for the year.  Thus the most credit you can get for any one employee is $5,000.  If you did not take an available credit when filing your original payroll returns you can file an amended return to do so.

There are some additional credits available in 2021 and the IRS continues to publish further guidelines so be sure you discuss this with your accountant.   There are, of course, other qualifying aspects so I recommend you go here to read the finer details.

FFCRA Tax Credit

From April 1, 2020, to March 31, 2021, the Families First Coronavirus Relief Act mandated qualifying employers to provide up to 12 weeks of paid time off for employees affected by Covid.  This included an employee becoming ill with Covid, an employee’s family member who needed care due to becoming ill with Covid and employees who needed to supervise children that were doing virtual schooling. An employee satisfies the criteria if they cannot work or telework in order to care for a child.  Thus if your employee was working from while simultaneously supervising a child, those wages do not qualify.

The FFCRA tax credit provided a credit to eligible employers for the wages paid and the employer’s share of Medicare taxes.  This credit is also taken on quarterly payroll returns by either a refund upon filing or a reduction of taxes paid in throughout the quarter.  If you did not take an eligible credit on your original return, you can amend to do so.  This credit is also refundable so once more, cash back in your pocket.  Note that you cannot use eligible wages claimed for this credit for either the ERT credit or PPP loan forgiveness.  Read more about this credit here.

Conclusion

You can take advantage of the above credits even if you received a PPP loan; however, you cannot use the same wages for any of the credits and loan forgiveness.  Thus you have to be able to track and categorize your wages so that none are used for more than one of these programs.

These changes and special tracking requirements make for a complicated and stressful tax season for you and especially your tax accountant. Additional research and work will be needed along with lots of patience.  Extending your returns doesn’t mean you will lose out on credits or increase the chance of audit.  Extending your returns may be necessary to give you and your accountant time to properly identify the benefits available to you. If you can afford to extend, it may also give your accountant the ability to prioritize other businesses who may be in desperate need of eligible refunds. Talk to your accountant. Be kind. Be considerate. We are all in this together.