by Mikkel Jensen, US Director of Ageras
If you’re reading this: congratulations. You have made it to 2021. This past year has been one of the most tumultuous in recent memory, and most of us – if not all of us – are glad to see it end. Although the calendar year will soon be over, there is still one persistent factor remaining that will carry over with us into the New Year, hanging over our heads like a dried-out and withered mistletoe.
We are talking, of course, about tax season.
While tax season is almost unanimously dreaded year after year, this upcoming season is expected to be a little bit different due to the number of businesses who filed for loans or relief, such as the Disaster Assistance Economic Injury Loan, or relief given out through the U.S.’s Small Business Association’s (SBA) Paycheck Protection Program (PPP). Most business owners that filed for one such loan did so this year for the first time to help mitigate their economic losses due to the COVID-19 pandemic, but still remain unsure as to how it will affect their taxes for the upcoming year.
Thankfully, Ageras is here to help. Ageras is the world’s leading matchmaking service for accounting, bookkeeping, and tax services, and these are the best practices our experienced team of tax-savvy professionals has generated for the upcoming tax season.
Know if Your Loans Are Taxable Income or Tax-Deductible.
Receiving a loan for your business from an entity such as the SBA is considered differently than the revenue that your business earns directly. This means you won’t be taxed for the principal amount of the loan and should be able to claim interest payments on the loan as tax-deductible. Since this past year also saw a disaster occur in the form of a global pandemic, small businesses and individuals who own them may be eligible to claim financial losses related to the pandemic on their tax returns as tax-deductible.
So long as you are the party considered legally responsible for the loan and have agreed with your lender to repay it via a ‘debtor-collector’ relationship, any interests or fees associated with loans you received this year should be considered tax-deductible.
Claim All Disaster-Related Losses For a Faster Tax Refund.
This past March, then-president Donald Trump declared all 50 U.S. states, as well as the capital city of Washington D.C. and five of the nation’s territories as designated disaster areas due to this year’s pandemic. Because of this, virtually every business operating in these areas could be considered eligible for additional refunds on their tax return due to financial losses suffered as a direct result of the pandemic’s impact on their business.
Qualified losses suffered could cover an array of factors including inventory or location closures, and designating these losses as occurring within the 2020 calendar year AND as a direct result of COVID-19 on an amended 2019 return could potentially lead to an expedited refund on your upcoming tax return.
Understand If Your Loan Will Be Forgiven.
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the SBA offered small businesses additional relief options earlier this year via PPP loans.
A 2020 loan from the SBA that was designated as an Economic Injury Disaster Loan possessed a maximum loan amount of $2 million and cannot be forgiven on your upcoming taxes if you received an amount nearing the maximum limit. However, if you received an SBA loan that was designated as an ELDL Advance with a maximum loan amount of $10,000, this could be forgiven on your upcoming taxes as it is considered a grant.
Likewise, if your business received financial assistance in the form of a PPP loan, this loan could also be potentially forgiven if your business meets the agreed terms of the PPP loan. So long as you received a PPP loan for your business, managed to keep all employees at the time of the loan’s filing on your company’s payroll for at least eight weeks, and appropriated funds from your PPP loan towards paying for expenses such as payroll, utilities, or rent or mortgage interest, your PPP loan should be forgiven.
Due to the unique circumstances each business impacted by COVID-19 has faced, we recommend consulting with your accountant or CPA to make sure your business qualifies for any or all of the practices listed above. Don’t let not having an accountant or CPA stress you out, either. Call or email the professional tax team at Ageras today to get three free quick quotes that match your business needs to a tax professional today.
Mikkel Jensen is the US Director of Ageras, a matchmaking service that creates a transparent market for accounting, bookkeeping & tax services for the benefit of both clients and the industry. His focus is to help create an eco-system that can deliver a holistic group of accounting services for small and medium-sized companies.