The coronavirus pandemic created challenges for businesses in every industry, with small businesses being hit the hardest. In fact, according to Track the Recovery, the number of small businesses in the U.S. has dropped by 29% since January 2020. One way for small businesses to put money back into their pockets when they need it most is to legally pay less in taxes. Here’s how to use the opportunities provided by the CARES Act and other tax strategies to reduce your taxes.
Revival of the Net Operating Loss Carryback
One of the biggest tax benefits of the CARES Act was the revival of the net operating loss carryback. Under the Tax Cuts and Jobs Act, businesses could only carry-forward 80% of losses into future years, but the provision within the CARES Act now allows a five-year carryback from 2018, 2019 or 2020. While the deadline to file a quick refund claim for 2018 net operating losses has passed, 2018 losses can still be claimed by filing an amended tax return no later than three years after the original return was filed. For example, if a 2018 corporate return was filed on March 15, 2019, the taxpayer has until March 15, 2022, to file the carryback claim for 2018. Quick refund claims are still available for 2019 tax returns until June 2021. Carryback claims for 2020 should be filed at the same time, or shortly after, the original return is filed and no later than December 31, 2021. The CARES Act also suspended the 80% taxable income limitation, which allows a new operating loss carry-forward to fully offset taxable income in years beginning before January 1, 2021.
Deducting Expenses Paid for by a Paycheck Protection Program Loan
Shortly after the Paycheck Protection Program was first signed into law to provide small businesses forgivable loans, the IRS stated that the usual deductible business expenses that were paid with the loan were not to be deductible. According to the U.S. Small Business Association, without a legislative fix, small businesses with forgiven PPP loans or those with a reasonable expectation of forgiveness were facing likely tax increases of up to 37% for 2020. Luckily, at the end of 2020, Congress passed a bill that was signed by the President allowing expenses paid with a PPP loan to be deductible. Connect with your CPA to ensure that you’re taking all the deductions available to you.
Maximizing the Home Office Deduction
Many small business owners are afraid to deduct their home office because their accountants tell them it can raise red flags for auditors. The reality is that if you are handling your home office deductions the way the IRS wants you do, you will never have to tell the IRS that you have a home office. To qualify for this deduction, the space you use for your home office must be used solely for business. Even a small area set aside in your home used regularly and exclusively for specific administrative or management activities qualifies. If you have returned to a physical office, you can still deduct your home office if you use it every morning and night exclusively for the management and administrative duties of the business when these functions are not conducted in the principal place of business. Allowable home office expenses include utilities, mortgage interest, property taxes, homeowners and liability insurance, repairs and maintenance of office area and depreciation of office area. While you can’t deduct 100% of those expenses, they are allocated based on square footage or number of rooms in the house. In addition, having a home office means that your drive to work is also deductible. In many cases, this can double the amount of the deduction for your car expenses.
It’s easy to become overwhelmed when beginning to prepare your taxes, but it’s important to recognize that it’s also an opportunity to reduce them. The latest relief package signed in December also provided many opportunities for the 2021 tax season, including increasing business meal deductions to 100%, extending and increasing the employee retention tax credit and more. Take the time to meet with your CPA and learn how to maximize your tax savings for not only the 2020 tax season, but how to strategize for 2021, too.
Tom Wheelwright is a CPA, CEO of WealthAbility®, best-selling author of Tax-Free Wealth (Rich Dad Advisors Series), speaker, entrepreneur and host of two popular podcasts: “The WealthAbility® Show with Tom Wheelwright CPA” and “The WealthAbility® for CPAs Show.”
