Planning amid Uncertainty: Tax Considerations Business Owners Should Keep in Mind as 2021 Begins

Businesses, no doubt, are eager to leave behind the uncertainty of 2020 for a much more stable 2021. But the truth is that many of 2020’s uncertainties will hang over into the new year. That is why now is the right time to get a jumpstart on 2021 tax planning.

Here are several key considerations businesses should weigh as they prepare their 2020 taxes and plot out their tax strategies for 2021.

• PPP loan forgiveness: Paycheck Protection Program (PPP) loans provided a lifeline to many companies in 2020. With many banks having opened up portals for businesses to apply for forgiveness, businesses will want to compile all necessary documentation that PPP funds were used properly and accounted for to secure loan forgiveness. And thanks to the recent Consolidated Appropriations Act, 2021, signed by President Trump last month, businesses can now deduct expenses paid with PPP funds on their 2020 tax returns. The Treasury Department had previously issued guidance that disallowed such deductions because PPP loans are forgivable and not taxable income.
• Deferred 2020 payroll taxes: Section 2302 of the CARES Act allowed employers to defer payment of the 6.2% Social Security payroll tax for employees from March 27, 2020, through the end of the year. Although few businesses chose to do so, those that did must strategize how they will repay them. Half of the deferred amount must be paid by the end of 2021; the other half is due by the end of 2022. Even with the extra time, businesses will have to determine the best way to ensure they can repay any deferred payroll taxes when the time comes, weighing any potential issues like cashflow.
• Business entity changes: In planning for 2021, business owners should evaluate the current structure of their business and determine whether it makes sense to switch from a pass-through entity to a C corporation or vice versa. Based on current corporate tax rates, one structure may be more beneficial than the other. However, business owners will want to keep an eye on any potential changes out of Washington once President-elect Biden is sworn into office. He has proposed tax changes that could impact tax rates for C-corps and pass-through entities.
• NOL carrybacks or carryforwards: Under the CARES Act, businesses that generated a net operating loss (NOL) in tax years beginning after December 31, 2017, and before January 1, 2021, can carry those losses back up to five years to generate a tax refund of taxes previously paid. This can infuse some much-needed cash into a business that was profitable prior to the pandemic and experienced a severe drop in revenue. The Tax Cuts & Jobs Act of 2017 still allows businesses to carry forward losses from previous years to offset future tax liability, with the CARES Act providing the additional benefit of temporarily removing the 80% limit on the use of NOLs. Depending on individual circumstances, business owners will want to evaluate whether a carry-back or carry-forward makes sense as they prepare 2020 taxes and plan for 2021.

What About the New Pandemic Relief Bill?

After months of gridlock, Congress passed a $900 billion economic stimulus bill — the Consolidated Appropriations Act, 2021 — that provides additional pandemic relief for many businesses. The new package includes a range of benefits for individuals and businesses, but the highlight for business owners is new funding for a second round of PPP loans. This new funding, which consists of $325 billion in aid, is specifically targeted at small businesses with fewer than 300 employees that did not receive assistance earlier in the pandemic and saw revenue drops of at least 25% during the first, second or third quarters of 2020.

The new legislation also allocates $20 billion for Economic Injury Disaster Loan Grants to businesses in lower-income communities. Businesses that received previous PPP loans can qualify for a second loan if they can illustrate significant 2020 revenue reductions compared to 2019.

The new relief package features a number of items that could prove beneficial to many businesses. Business owners should consult with their accountants and financial planning teams to discuss and determine the best direction for their circumstances.

Further Government Action

Although the ink on the latest economic relief bill isn’t yet dry, it remains possible that more aid could be forthcoming. Business owners should keep tabs on what happens in Washington with a newly elected Congress and president set to be sworn into office.

Additionally, tax code changes could be on the table that may impact businesses and business owners, as President-elect Biden campaigned on raising the corporate tax rate and income taxes on high earners. He has also signaled a possible expansion of payroll taxes that fund Social Security and Medicare.

It remains to be seen what tax changes, if any, will be implemented, and how any new policies will affect businesses. Even so, business owners will want to keep a close eye on any potential legislation in Washington and consult their tax planning team on any necessary changes to take advantage of additional relief while simultaneously limiting any potential negative impacts.

Kris Yamano is a market leader with BMO Wealth Management. She leads a team of professionals dedicated to providing high-net-worth families, closely held businesses and charitable organizations with a full range of customized wealth services that include investment management, private banking, trust and estate services and comprehensive wealth planning.