Much has changed since the coronavirus pandemic hit. The world of work will never be the same again. And neither will the world of taxes. For the first time ever, the IRS extended the tax filing deadline from April 15 to July 15, 2020. The pandemic hit industries like hospitality, healthcare, and retail hard, while others like technology and delivery services boomed.

As we head into the 2021 tax season, it’s crucial to stay on top of changes that could affect the financial position of your business. Regardless of your industry, here’s a list of major tax changes in 2021 you should be aware of. And if you’re wondering about updates that affect your individual taxes, see here.

#1. Loan deferment comes at a cost.

7(a) loans, 504 loans, and microloans deferment

What it was for Tax Year 2019

These Small Business Association (SBA) loans predate the pandemic. The 7(a) loans are general small business loans of up to $5 million. 504 loans go up to $5.5 million to provide financing for major fixed assets such as equipment or real estate. Microloans are short-term loans of up to $50,000 for small businesses.

As part of the overall COVID-19 relief effort, the federal government put into place a program putting all SBA loans on a 6-month “free period.”

What it is for Tax Year 2020

The SBA paid six months of principal, interest, and any associated fees for the loans that were in regular servicing status as of March 27, 2020 (when the CARES Act was enacted), or were applied for after March 27, 2020 and fully disbursed before September 27, 2020. What the federal government didn’t tell business owners is that there is a different kind of cost that comes with this “free period”. That is, that these loans count as taxable income.

Expert advice from our certified tax consultants

When you file your 2020 tax returns, you must report the 6 months’ worth of principal payments that the SBA made on your behalf as taxable income. Include this as part of your business gross income on your tax return and deduct the interest portion of the payments. Also include any deductible fees the SBA paid on your behalf.

#2. Your employee retention credit is increased.

The newly-extended employee retention tax credit (ERTC) is a credit available to business owners who, despite challenges posed by COVID-19, chose to keep their employees on the payroll rather than lay them off during the pandemic.

What it is for Tax Year 2020

This credit is a refundable tax credit. It is applied against the employer share of Social Security tax equal to 50% of the qualified wages paid to employees from March 2020 through December 31, 2020. These qualified wages are limited to $10,000 per employee, per calendar year.

What it will be for Tax Year 2021

This credit is now up to 70% of the qualified wages employers pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter. Therefore, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Expert advice from our certified tax consultants

You can claim this tax credit on your payroll tax return, not your income tax return. The downside to keep in mind, however, is that the business may NOT claim the wages used to calculate the credit as a deduction. The tradeoff may be well worth it in many cases. Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits.

Effective January 1, 2021, employers are eligible if they operate a trade or business from January 1st through June 30, 2021. In addition, they must also experience either:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, OR
  2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that quarter are less than 80% of the gross receipts from the same quarter in 2019. (To be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%.)

#3. More credits relating to health and family are now available.

The sick and family leave tax credits are now bigger and broader so that more businesses may benefit. These credits are also available to self-employed entrepreneurs, even though they have no actual employees. This reimburses (through a tax credit) the business owner who had to be out of work partially or entirely to take care of themselves or a family member who had to quarantine or seek medical treatment related to COVID-19. This also includes someone who had to be out of town because their child’s school or daycare facility was closed due to the pandemic.

What it is for Tax Year 2020

This credit was based on wages paid to the impacted employees through December 31st. Employers received the credit as a payroll tax credit when they filed their employment (payroll) tax returns. There was also a way to get an advance on the credit. In 2020, all employers who had at least 500 employees on payroll were required to offer this benefit, with limited exceptions.

What it will be for Tax Year 2021

The Consolidated Appropriations Act has expanded this credit to wages paid through March 31, 2021. Additionally, it has removed the mandate that requires employers to offer this benefit.

Expert advice from our certified tax consultants

As an employer, if you paid this employee benefit it’s important to reconcile the credit claimed or the advance received on your quarterly and annual payroll tax returns.

#4. Paycheck Protection Program (PPP) loans are back and better than ever.

The government launched “Second Draw” PPP loans guaranteed by the SBA! Coming off the overwhelming popularity of last year’s PPP loans, and due to the continuing pandemic, the SBA is now offering another round of PPP lending through March 31, 2021. In terms of major tax changes in 2021, this is one you don’t want to miss out on!

What it is for Tax Year 2020

The first round of PPP loans were based on the business’s prior year (2019) average payroll costs. The loan is forgivable (and tax-free!) assuming that you used at least 60% of the loan proceeds in the first 24 weeks for payroll and payroll-related expenses.

What it will be for Tax Year 2021

To be eligible for “Round Two,” a business must have first applied for, received, and used all of the Round One funding by March 31, 2021. It must also have fewer than 300 employees, have been in operation on February 15, 2020, and have experienced at least a 25% decline in gross revenue in 2020 compared to 2019.

Expert advice from our certified tax consultants

Be aware that even though there is no real tax impact, if you had the PPP loan forgiven on the federal tax return, some states will force you to pick up income at the state level. Therefore it’s extremely important, this year more than ever, to carefully consult with a professional tax preparer when preparing your 2020 tax return.

Don’t let these major tax changes in 2021 catch you unaware.

Stay on top of the constantly changing tax landscape with the help of a proactive tax consultant from Lodestar. We’ll help you avoid penalties and maximize your tax credits this season. Call us at 704-981-4602 or email info@lodestartaxes.com.