By now, you’ve probably heard that May 17th is the new deadline for your 2020 tax filing. But if you own a small business, especially in the state of California, this change may be more news than good news.
Pandemic Tax Relief for Small Business
For many small businesses seeking pandemic relief, the last year has felt like a roller coaster. When the US Treasury extended 2019 tax deadlines to July 15, 2020, small business owners’ sights went up with a few extra months to strategize around the economic shock. And with the introduction of the Paycheck Protection Program inside the CARES Act, the federal government provided hope when many businesses were down.
However, PPP borrowers faced another drop with strict guidelines for forgiven dollars and even bigger uncertainty around whether or not funds would be considered taxable income. Many businesses were forced to choose between holding back much needed funds for tax savings or spending the money knowing they would have a potential tax liability they couldn’t cover.
Fortunately, Congress gave businesses a boost when they finally clarified that forgiven PPP funds would not be counted as taxable income in the Consolidated Appropriations Act (CAA). Additionally, after the IRS announced that these same funds could not also be counted as allowable expenses, Congress overrode their decision and qualified PPP money as allowable deductions on 2020 corporate tax returns—offering businesses another hand up.
Both the CAA and the later American Rescue Plan expanded eligibility for PPP loans along with processes to allow qualifying businesses to take advantage of a second draw. For some businesses in hard hit industries like restaurant and hospitality, these expansions meant the difference between re-opening or permanent closure.
The problem is not every state approved deductible PPP funds, and many states like California, remain in limbo as the tax deadline fast approaches.
What the extended tax deadline is and isn’t
Despite taxpayer advocacy from the American Institute of Certified Public Accountants, the extended May 17, 2021 deadline only affects an individual’s federal tax return. That means that business tax returns are still due on April 15th, along with Q1 estimated taxes for 2021. For this reason, many tax advocates argue that the extended deadlines do not go far enough.
Historically, Q1 taxes are based on the prior year’s tax liability and follow a safe harbor estimate or 25% of the last year’s tax liability. According to Matthias Weber, partner at Weber, Christensen, & Heinrichs Accounting, the profound difficulty many businesses faced in 2020 is further compounded in states that have not approved PPP money as deductible expenses. With 2020 financials still incomplete due to the uncertainty of full PPP loan forgiveness, April 15th puts a lot of businesses and their accounting advisors in a tough spot. “For many businesses, that means using 2019’s tax liability as an estimate, which requires small businesses to potentially overpay at a time when they need the money most,” says Weber.
California’s special challenge
Despite the impending tax deadlines, AB 80, the law that would ensure total PPP loan forgiveness has yet to pass in California. On March 12, 2021, the governor’s office put out this statement: “The legislation that would conform to the federal tax treatment of these grants will be delayed temporarily while we seek detailed guidance from the U.S. Treasury Department regarding provisions in the American Rescue Plan Act.”
AB80 would allow California small businesses to count up to $150,000 in PPP funds as business deductions on their 2020 taxes, which would significantly affect tax liability for these entities. Moreover, this adjusted number would mean decreased Q1 estimated taxes due April 15th. For now, California’s accountants are stuck meeting deadlines with final numbers that exclude any PPP funds as deductions while simultaneously preparing for the hopeful approval of further tax relief.
What’s next for your small businessesMost years a robust, year-round tax strategy will save your small business a lot of time, money, and heartache. This year poses special challenges, especially for California small business owners. If that’s you, make sure you’re receiving strategic guidance from your business and tax advisors.
Your 2021 tax strategy should be integrated into more than last year’s potential losses (or even gains) but also with your business’s overall financial health and plans for the future. Many businesses will be able to recover from 2020, but not without a comprehensive business growth and tax strategy.