Many companies took out forgivable Paycheck Protection Program (PPP) loans to keep long-time employees on the payroll. The CARES ACT established the PPP, and the Small Business Administration processed loan requests, even some for publicly traded larger enterprises. The government made an estimated $659 billion available for businesses to retain employees and up to 40% to cover other expenses, such as rent, mortgage interest and utilities.
As long as businesses used the loans for employee retention and qualified other expenses, they didn’t have to pay federal taxes on the loan, although each state has its own rules. Still, the PPP is outside the norm for business taxes, so there are some things you need to keep in mind as you keep paperwork and get ready to file 2022 taxes next year.
The Build Back Better Act also allotted tax incentives for implementing clean energy along with some new taxes on larger corporations. For example, research and expenditures after December 31st, 2021 are no longer deductible as an expenditure. Instead, the expenses must be amortized over five years or more. The time period is even more stretched out for “foreign research.”
1. Research the rules frequently
If your company has 500 or fewer employees, you may wonder how to handle PPP loans. The rules about how to report and file COVID relief on 2022 taxes continue to shift. State legislatures may vote on different options than what the federal government implements in regards to PPP.
For example, Congress voted to allow companies to take the tax exemption on the COVID relief funding and also deduct business expenses even if they used the funds from the loan to pay for them. The extra break might help businesses on the brink of closing get over the hump. However, some states created their own rules around COVID relief funds and tax exemptions.
Build Back Better (BBB) also has some changes for corporations with multinational interests with the rules still in a changing landscape. You may want to hire a tax professional adept at navigating the changes and helping your company gain the highest deductions possible to lessen your tax burden.
2. Prepare for delays
All the added programs and distributions for pandemic relief fell on the Internal Revenue Service (IRS). Already faced with a backlog of returns, some refunds were even further delayed. If you run a small business as a sole proprietor, you may find yourself waiting to get back money you’re owed by the federal government.
Because the IRS had to handle the stimulus checks to millions of Americans, many tax refunds were not issued timely. You may run into a situation where you have past-due debts the IRS is just picking up. Utilize the extra time you have now to submit an amended return or pay down your debt to avoid even heftier fines.
3. COVID relief grants
If you’re in specific industries, such as restaurant or hotel/event venues, you might have received one of two specialized grants from the federal government–the Restaurant Revitalization Fund or a Shuttered Venue Operators Grant.
While the grants aren’t taxed on the federal level, you may still have to count the money as income on state taxes.
If you received a state grant, you most likely have to report the money as income, so be sure to set aside enough to pay into estimated taxes so you don’t incur penalties for underpayment. If you receive a 1099 for a grant, read it carefully to see if it’s taxable. You may wish to consult a tax professional to find out if there are any ways to reduce your tax liability.
The 2017 tax cuts meant to benefit manufacturing start expiring this year, which means tax rates go up.
4. Deferred social security payments
The CARES ACT allowed employers to defer their portion of social security payments. However, the money must be paid in eventually and now it’s due. If companies didn’t set the funds aside, it may be a struggle.
Half of the deferred funds were due by December 31st, 2021. The IRS stated penalties will incur for anyone who misses the deadline. The rest of the deferred funds are due by the end of 2022. In addition, employers must pay their portion into the system as they normally would, increasing the burden on already struggling businesses.
If you deferred social security payments and it’s a struggle to catch up, try dividing the amount owed into smaller payments so it isn’t so overwhelming on the due date. In the worst case scenario, it’s better to contact the IRS and be honest about your struggle.
While you will likely still incur penalties and interest, they can find a solution for payments that might work for you and help you avoid additional penalties. You could also hire a tax professional to mitigate for you and come up with a workable solution.
5. Clean energy credits
Clean energy tax credits are still in flux. Set to expire, Congress can extend them into 2022 and possibly beyond, depending upon who retains control of Congress. Some industries may see more breaks than others, such as the clean energy sector.
Keep an eye on the incoming party and make decisions accordingly. It might be smart to upgrade and take advantage of credits before year’s end, for example.
Navigating new tax structure
The CARES ACT likely helped many businesses get through the challenge of a global pandemic. However, it also set up some scenarios that might cause problems in 2022, such as deferred payments coming due when the economy still sputters. The ups and downs of the tax structure and expiring credits will further impact companies of all sizes.
When in doubt, enlist the help of someone well versed in current business tax law. You may wind up saving more money by consulting a professional than you’d pay in penalties and interest.