Corporate CFOs have had their hands full this year, accounting for the abnormalities that came bundled with a global crisis and the COVID-19 Pandemic. Between sending workers into poorly equipped home offices, shutting off the valve on corporate travel and managing government Paycheck Protection Program (PPP) loans, these executives were definitely busy.
But what about the small- and medium-sized business owners who did not have the benefit of a well trained CFO on staff in 2020? In this post, I’ll speak to a number of issues that these business owners should consider as we approach year end.
Please note that nothing here should be construed as specific tax advice for your unique situation. Call our office if you have any questions.
What about that home office deduction?
When thousands of business owners sent millions of Americans home to work to avoid COVID-19 infection, some expected the home office deduction to explode, but that will not happen.
As the IRS has pointed out on its website:
“The home office deduction allows qualifying taxpayers to deduct certain home expenses on their tax return. With more people working from home than ever before, some taxpayers may be wondering if they can claim a home office deduction when they file their 2020 tax return next year.”
However, employees are not eligible to claim the home office deduction. Furthermore, a small business owner cannot pay an employee for the use of their home as a home office and then write those expenses off on their 2020 tax return.
It is admissible for the business to write off the equipment and office supplies used in the employees home office, though capital expenses may still have to be depreciated according to the appropriate schedule.
What about those PPP loans?
If there is one area in which we expect to see ongoing confusion it will be centered around the federal government’s PPP loan program. Designed to help businesses save jobs and keep America working through the crisis, there has been some confusion about how these funds should be accounted for from a tax perspective.
If the loans are forgiven, which happens if a business uses at least 60% of the funds to cover payroll costs, the IRS says the transaction is tax-free…with a catch. While the business need not pay taxes on the proceeds, it cannot write off expenses covered by the forgiven PPP loan. The business must treat those funds as profits and pay taxes on them.
But this is subject to change. A group of more than 560 business groups, including the American Institute of CPAs, has already sent a letter to lawmakers asking that lawmakers allow PPP borrowers to write off these expenses.
While it is not usually wise to bet on Congress passing a law this late in the year, this initiative is tied to a $908 billion emergency relief framework that lawmakers from both sides of the aisle are pushing. It’s not clear how the senate elections in Georgia might impact this, so stand by.
Other Year End Considerations
There are certain transactions small and medium sized enterprises can take advantage of even after the tax year ends that can have a positive impact on their financial position from a tax standpoint.
Among these are certain retirement plans, such as the Simplified Employee Pension Plan, or so-called SEP IRA, and the Savings Incentive Match PLan for Employees, or SIMPLE IRA. Both of these plans allow for non-taxable contributions from employers after the tax year ends.
Finally, it should be noted that 2020 will be a very complex year, with the IRS working through a record number of tax filings and sorting through fraud and problems caused when the government sent stimulus checks to ineligible taxpayers. If there was ever a year to file your paperwork early, this would be it.
By filing early, not only are you likely to receive refunds and credits more quickly, but you reduce the risk of identity theft, something we’re seeing more often of late. Remember, you can file early but your deadline for making any required payment doesn’t change, so there’s no reason not to do it.
If you are a current client, don’t delay in reaching out to us. If you are seeking a new advisor, please call our office soon to ensure that we have time to review your situation before the year is over.