In 2020, there were drastic changes in operations for small and medium-sized businesses. These unprecedented obstacles have created several new considerations for tax preparation for not only the 2020 tax year, but also for filing your 2021 return next year. With added complexities due to Covid-19 in several key areas, many business owners are questioning the best strategies for tax preparation.
New Tax Considerations That Are Vital to Your Business
Many business owners are faced with unprecedented accounting and tax issues due to COVID-19. Between tax extensions, stimulus checks, and COVID-19 related loans and grants, there’s a lot for SMBs to consider. For any business receiving loan or grant money, careful documentation and added tax preparation will be something that will affect the business for years to come.
Follow these helpful guidelines to make tax preparation easier for your business in 2021.
Make Sure Your Business Has Accurate Records
Keeping an accurate account of your business finances can be tough under even the most optimal conditions. However, with the added stress and complexities of 2020, the next two year’s tax filings will be more burdensome for SMBs. Making sure that your records are up to date throughout the year should be your highest priority. With changing guidelines and regulations, you’ll want to be able to provide a clean set of books at a moment’s notice.
For businesses using the accrual basis of accounting make sure to write off all COVID-19 related bad-debts by end of the year.
Also, make sure that any revenue losses due to COVID-19 make their way to the books. This is especially important if your business uses the accrual method of accounting.
Get Professional Help With PPP or EIDL Loans
If you are one of the many business owners who don’t understand the nuances behind deductions or forgiveness for the SBA loans, such as the EIDL (Economic Injury Disaster Loan) advance and the PPP (Paycheck Protection Program) it’s important that you consult a dedicated tax professional.
The stipulations on these loans have important tax consequences for businesses to consider (not only this spring) but throughout the entire year for submitting quarterly estimated taxes.
EIDL Advances are Taxable
If your business received the EIDL advance, this immediate grant funding is considered taxable income as outlined by the IRS. This means that you will need to provide accurate accounting for this grant when you file your 2020 tax return.
Additionally, EIDL loans received in 2020 need to be accounted for on a balance sheet, even though interest won’t start accruing until some time in 2021. SMBs may need professional tax prep assistance in order to correctly record this as a liability on the Schedule L form.
PPP Forgiveness Gets Reported as Nontaxable Income
If you received PPP forgiveness prior to 12/31/20 it gets reported as nontaxable income. However, if your business has obtained or will obtain forgiveness in 2021, you won’t report that until the next calendar year in 2022 when you file your 2021 tax return.
To make this simple to remember, understand that you will always record loan forgiveness in the year that you receive it.
Remember, every bank has a slightly different process, but ultimately the PPP application is the same. Businesses should be aware that even though they may have had to provide backup documentation to the bank/lender to certify their claims, they should always have that information ready in case the SBA asks for it. Accurate documentation can be requested at any time, so it is always best to stay on top of your books and have it ready and available.
Account for all Personal Records
For any tax year filing pay special attention to any business expenses that you paid for out of your own pocket. Make sure that these expenditures get recorded and accounted for in your tax records.
Adjust for Stimulus Checks
For anyone (including business owners) who received personal stimulus checks at any point in 2020, these must be accounted for on your tax return.
If you didn’t receive the first or second-round stimulus check, then you have the opportunity to make an adjustment and claim it as a deduction in 2020.
Tentho Can Help
Tentho are experts in helping clients navigate their finances, especially in the recent changing tax climates, which are more challenging than ever before. Tentho can work with you to create a year-round solution to tax preparation that helps you stay on top of changing regulations and information that is vital to your business. Tentho encourages business owners to meet with one of their seasoned tax professionals, at least twice a year.
For at least the next two years, the complexities of the PPP and EIDL loans will require business owners to have timely, accurate accounting and record keeping.Tentho can manage the accounting and maximize your deductions, so business owners can focus on the business of growing.
If you are ready for a dedicated financial team to make your tax preparation painless in 2021 and beyond, schedule your free consultation with our financial experts.