How Tax Planning Can Limit Economic Damage From COVID-19

Since the COVID-19 pandemic hit the United States and triggered closures beginning in March 2020, more than 43% of businesses closed temporarily. In a survey of 5,800 businesses, the National Academy of Sciences found that a typical small business with more than $10,000 in monthly expenses only had two weeks’ worth in cash reserves on hand to cover expenses related to the pandemic. As you prepare to reopen your business, using these tips from our New Jersey tax attorney could help you limit the damage caused by extra sanitizing, purchasing personal protective equipment (PPE), and other issues related to COVID-19.

Follow the Rules of the Paycheck Protection Program

If your small business applied for and received funds from the Paycheck Protection Program, make sure you follow its rules. Those funds were designed to ensure that you would bring your workers back as soon as you open your doors. If you fail to bring back all of the workers whose wages you paid for with the Paycheck Protection Program funds, you could end up owing a lot of money in fees and penalties on your taxes. Be sure to keep all documents related to the number of hours your employees worked before and after the closure, how long your employees were furloughed or laid off, and how many you asked to return but who declined.

Physical Damage From COVID-19

If you can prove that COVID-19 was in your business, you may be able to file an insurance claim for the costs of repairing or mitigating the damage. For example, you may have had to replace your HVAC filters and install a temporary air purification unit to kill any active virus particles. Restaurant owners who had to discard potentially contaminated food may be able to deduct those food and beverage losses.

What to Do After Insurance Denials

If your insurance company denies your claim, you can challenge it. It helps to have an attorney familiar with business accounting and taxes on your side. If your insurance claim is denied after you appeal their decision, you still have a way to recoup some of your losses. The Internal Revenue Service and New Jersey state tax authorities allow business owners to deduct losses on their state and federal quarterly estimated and annual tax returns. Some of the losses you may be able to deduct on your business’s income tax returns include the expenses you incurred to mitigate damage, such as installing plexiglass barriers at checkouts or purchasing masks for customers who did not have their own.

Deductions for Increased Costs of Doing Business

You may also be able to plan your taxes in a way that allows you to deduct the items that have increased your cost of doing business. For example, Governor Phil Murphy of New Jersey has required business owners to provide face coverings for employees who are not able to maintain a 6-foot social distance in the brick-and-mortar location. Some business owners also choose to make masks available for customers when social distancing can’t be maintained. You may also be paying more for cleaning supplies or a specialty cleaning service. These are deductible operating expenses.

Other Damages From COVID-19

If your business property was damaged as a result of the COVID-19 pandemic, you may be able to deduct those damages from your taxable income. For example, if one of your employees tested COVID-19 positive, you may have had to shut down, pay for specialty cleaning, and hire a temporary person to cover the ill employee’s shift until the employee was able to return to work. You would have likely lost income as a result of closing your business during this time. If the information about your employee’s illness became public, your business may have lost additional income related to public opinion or perception. These are all types of property damage.

The best time to start planning your 2020 taxes is now. To learn more about tax planning and how to limit the damage COVID-19 could wreak on your business, contact our New Jersey tax attorney in Cherry Hill by phone at (215) 519-4269, or complete our form to schedule a consultation.