On November 3, 2020, I did a SCORE LIVE webinar on Year-End Tax Planning for Your Business (you can listen to a recording). Due to high attendance, there were many questions but not enough time to answer them all. Here are some of the questions and answers that may be helpful to your business (it’s not all of them). This is not meant to be tax advice; it is provided for generic information purposes only.
Q: I got an EIDL grant of $10,000 from the SBA and also received a loan under the Paycheck Protection Program? Are these proceeds taxable to me?
A: The $10,000 EIDL grant may or may not be taxable; the IRS has yet to rule on this and arguments can be made for both options (it’s taxable unless the IRS says otherwise). A loan under the Paycheck Protection Program that’s forgiven is not taxable; the law specifically says this. However, if you obtain loan forgiveness for the PPP loan, you must repay the $10,000 grant. If the grant is taxable, then expenses paid from the grant are tax deductible to the extent otherwise allowed.
Q: My business received a $3,500 incentive grant from my local government for COVID-19 relief. Is this taxable?
A: For federal income tax purposes, grants that do not have specific tax-free treatment (like EIDL grants) are taxable. The IRS said so. There may be different tax treatment for state income tax purposes.
Q: Can I write off the cost of masks my business donated to charity before the end of the year?
A: A charitable donation is possible, but how to handle the write off depends on several factors. If the masks were your inventory items, then charitable donations generally are limited to the lower of fair market value or your cost (with an adjustment to inventory). If you purchased the masks and then donated them, different rules apply. For more information about deducting charitable donations, see IRS Publication 526*.
Your employees and other workers
Q: My employees have been required to work remotely due to stay-at-home orders. Can they claim a home office deduction and other business expenses?
A: The deduction for unreimbursed employee business expenses (an itemized deduction) is suspended for 2018 through 2025, so no such write offs can be claimed. However, Congress may change this rule in light of remote work arrangements, so monitor developments.
Q: I have a single-member LLC. I know that the work opportunity tax credit is set to expire at the end of 2020. Can I take this credit for myself if I fall within a targeted group?
A: The work opportunity tax credit is for hiring eligible employees from a targeted group. The credit cannot be taken for an owner, or for hiring an owner’s relatives (e.g., children). What’s more, the credit applies only to employees and, as an LLC owner you are a self-employed individual. Find more information about the work opportunity tax credit from the IRS.
Q: My business is thinking about using a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) for 2021. Can an LLC owner be reimbursed under a QSEHRA?
A: Owners may be covered by a QSEHRA, but only if they have W-2 wages.
Q: My business uses independent contractors. How much pay can they receive in 2020 before I have to issue a 1099?
A: Form 1099-NEC (it’s new for 2020 payments) must be issued to an independent contractor who received payments from a business that total $600 or more for the year.
Q: Can I write off the cost of business software that’s purchased and used before the end of the year?
A: The cost is deductible, but the way in which the cost is written off depends on various factors. Different rules apply to off-the-shelf software versus software developed for a specific company. Find more information about how to write off the cost of software in IRS Publication 946*.
Q: I own a manufacturing business and purchase material that’s factored into the cost of goods sold (COGS). Can I purchase inventory items before year end that won’t count toward inventory?
A: If you maintain inventory, then purchases before year end are taken into account for COGS. A small business (one meeting a “gross receipts test”) does not have to maintain inventory and can instead deduct purchases as non-incidental material and supplies. The deduction is taken when the items are first used or consumed in operations, so it may not be before the end of the year.
Your retirement planning
Q: I want to set up a qualified retirement plan for my business for 2020 or maybe wait until 2021. How do I decide which type of plan is best for my situation?
A: The IRS has a publication contrasting various retirement plan options for small businesses. You may want to discuss them with your CPA or other tax adviser.
Q: I’m a sole proprietor and want to use a SEP for my retirement savings. I’d like to contribute the maximum but won’t know my net earnings until after the end of the year. What if my net earnings fall short of my projections and I contribute too much?
A: Contributions to a SEP for 2020 can be made up to the extended due date for filing Form 1040 or 1040-SR (e.g., October 15, 2021, for the 2020 return if a timely extension is requested). It is a good practice to contribute some amount for 2020 during the year and make a final contribution when you are sure of your net earnings and the self-employment tax you’ll pay (likely after the year has closed). If there is an excess SEP contribution, it’s subject to a 6% excise tax each year until the excess is removed from the plan. For more information about SEPs, see IRS Publication 560*.
Q: Are Pooled Employer Plans only for retirement or can they be used for health coverage?
A: Pooled Employer Plans (PEPs) are a type of group retirement plan that small businesses may join to save on administrative costs and reduce fiduciary responsibilities while offering employees a 401(k) option. Find more from the DOL.
*The 2020 version of the IRS publication is not yet available. General concepts in the 2019 version apply, but dollar limits and other information may differ for 2020.