3 Ways the CARES Act Impacts Your Business Taxes

The Coronavirus Aid, Relief, and Economic Security Act, which was passed in March of 2020, extended $2.2 trillion in economic stimulus to all Americans impacted by the COVID-19 pandemic. If you own a New Jersey small business, there’s a good chance that CARES will change how much you get back from your taxes. From deferring payroll taxes to claiming charitable donations, there’s a lot you can do to get financial relief until the pandemic is over.

Deferred Payroll Taxes

CARES allows employers to defer payment of normal payroll taxes until a later date. This is one of the quickest ways for your business to get financial relief during the pandemic; you will be able to hold on to about 6.2% of your staff’s current wages.

Taxes deferred in this way will need to be repaid in two portions. The first half will be due by December 31, 2021, and the second half will be due by the end of 2022. Although the original CARES Act prevented PPP recipients from deferring taxes in this way, this was corrected on June 5 by the PPP Flexibility Act. There’s no interest on deferred taxes, making it easier for your business to make up the payments in the next two years.

The Employee Retention Credit

The Employee Retention Credit was designed for businesses that need help paying their employees but don’t want to take out a loan. If you haven’t participated in any of the CARES loan programs but have paid your employees between March 12 and December 31, you might be able to receive a credit that amounts to 50% of any qualified wages.

Should your business need immediate relief, you may be able to apply for this credit immediately instead of when you file your 2020 taxes. There are several limitations to the credit, including a cap of $5,000 per employee. To qualify, you’ll need to prove that your business’s operations were suspended or that your gross receipts were significantly less than those of the same quarter last year.

Expanded Deduction Opportunities

One of the ways that CARES helps small businesses is by increasing the number of available deductions. These deductions reference previous acts and may not be completely straightforward, so make sure to talk to your Cherry Hill, NJ, tax lawyer before trying to claim them on your return.

  • Charitable donations: CARES expanded the deductions for charitable donations from 10% to 25% of taxable income if those donations were to public charities. A provision was also included for food donations, creating an outlet for restaurants with otherwise unusable food inventories. These deductions can be carried forward for up to five years.
  • Business interest: CARES also changed the deductible amount of a business’s interest expense as set out in the TCJA from 30% to 50%. If your business qualifies, you can take this deduction for the 2019 and 2020 tax years.
  • Property improvements: The TCJA act was passed with something called the “retail glitch,” which allowed property improvements to be deducted over a course of 39 years. CARES corrected the glitch, allowing improvements to be deducted over 15 years. This can be retroactively applied to taxes for 2018 and 2019.
  • Excess business losses: Net operating losses can be used to offset up to 100% of your taxable income for years prior to 2021. This can be carried back for up to five years and can be carried forward indefinitely.

When CARES Might Make Your Taxes Higher

CARES was designed to help small businesses by offering credits, deductions, and deferrals for your 2020 taxes. Some of these changes also apply retroactively, allowing you to claim additional refunds from the previous two years.

However, because some of these changes are retroactive, there’s a small chance that your business could sustain a loss. If you deducted property improvements that were impacted by the changes to the TCJA act, you may need to refile your returns for 2018 or 2019.

You should also make sure that you keep track of deferred payroll taxes while the pandemic continues. This money is deferred and will need to be repaid in both 2021 and 2022. Even if you don’t have a plan to make back those funds, you should still keep records to ensure that you’re not asked to overpay when next year’s taxes roll around.

If you own a New Jersey small business that’s been impacted by COVID-19, you may be eligible for significantly more deductions and credits than in previous years. That’s why you need a Cherry Hill, NJ, tax lawyer to help you prepare your taxes and determine what you’re eligible for. Call the Dopkin Law Firm at (215) 519-4269 or contact us online to get started.