The COVID pandemic has impacted just about every aspect of our personal and professional lives. Federal taxes are no exception. According to the United States Treasury, the deadline for individual taxpayers, sole proprietors, and single-owner LLCs filing tax returns will be automatically extended from April 15, 2021, to May 17, 2021. This provision is part of the American Rescue Plan, signed into law on March 11, 2021, which impacts 2020 tax returns. While that gives business owners a little extra time to prepare their taxes, determining what can be deducted may be a bit more confusing this year. We’ve put together some information and small business tax tips to make the process a little easier.
Are COVID-Related Government Grants Taxable?
That is the big question. There has been much confusion about whether or not the funding provided by the Payroll Protection Program (PPP), Economic Injury Disaster Loans (EIDL), and the recently approved Shuttered Venue Grants (SVG) is taxable. It’s a fair question. Technically, all income, despite the source, is taxable income unless there is a tax law that provides an exception, such as the General Welfare exclusion.
This exclusion states that payments by governmental units under legislatively provided social programs that promote the general welfare are exempt from the recipients’ taxable income. To qualify, the payments must be made from a government fund for the promotion of general welfare and not represent compensation for services rendered. Although it sounds like all the government grants we’ve mentioned would fall into this category, initially, that wasn’t the case.
Originally, the IRS ruled that small business grants didn’t qualify for the General Welfare exclusion and that any normally deductible business expenses paid for with funds from these forgivable loans and grants would not be able to be deducted. However, with the reopening of PPP loans, new information was released stating that PPP loans that were or would be forgiven were not taxable. The same is true of EIDL and SVG funding. Also, normally deductible expenses paid with this type of funding would still be allowed to be deducted.
This may have some small business owners breathing a sigh of relief. However, one of the best small business tips is to work with your tax professional to make sure everything is done correctly. It is also a good idea to be well-prepared when meeting with them.
Small Business Tax Tips Checklist
This checklist can help you make sure you have everything you need for tax season.
Have the Right Forms
Knowing which forms are necessary for your business is the perfect place to start. For a sole proprietorship, you will need a Schedule C Form attached to your personal income tax return, or use a 1099-MISC. Corporations will use Form 1120, however, if you have an S-corporation status you will use Form 1120S. Partnerships will use Form 1065 as an informational return and submit your share of the business’s expenses, income, and losses on Schedule K-1.
Document All of Your Expenses
This should include any expenses you paid for out of pocket, any personal expense paid out of your business account, and if you travel for business, your mileage log. It is always recommended to keep your personal and business expenses separate. Even the most conscientious business owners can slip up.
Maybe you bought some software for your business online and used your personal PayPal account instead of your business credit card. It’s important to review your personal and business expenditures and identify and crossover expenses. For keeping your mileage log up-to-date, ditch the paper and pencil if you haven’t already and try one of the many mileage tracking apps available. Also, don’t forget to include meals purchased while traveling or meeting with customers.
Make sure to include any 1099 forms you’ve received or any you have issued any necessary to the non-corporate service providers as appropriate. If you pay for these service providers with a credit, debit card, or through a payment service such as Paypal, do not include these in your 1099 reporting. The payment processor is responsible for reporting those payments on Form 1099-K. If yours is a service-based business and you provided any work for a company or individual as a non-employee, you’ll receive a 1099-MISC form.
Gather All of Your Financial Records
You’ll want to be as prepared as possible when you meet with your tax professional. Make sure you have all of your financial records. These may include but are not limited to the following:
- Income statement
- Accounting documents
- Asset purchase details
- Depreciation schedules
- Balance sheet
- Bank and credit card statements
- Payroll documents
- Last year’s business tax return
- Partnership agreements
Has Tax Season Impacted Your Business Cash Flow?
One of the most beneficial small business tax tips is to estimate your taxes and plan for them financially. However, tax season can be full of surprises. If meeting your tax obligations has left your business strapped for cash and you need some short-term funding, CapFlow Funding Group may be able to help. We are dedicated to providing the business cash flow you need to survive tax season and will work with you to find the best funding solution for your business.
While CapFlow Funding Group specializes in factoring and merchant cash advances, we can also connect our clients with other alternative financing options that may be better suited to their business needs. We service many different industries with a variety of funding needs. Contact us today and find out how invoice factoring can help grow your small business.