8 Ways Business Taxes Have Changed in 2020

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(Newswire.net — August 5, 2020) — Today’s shaky economic environment has brought forth many changes in tax law. The coronavirus pandemic has made an indelible impact on the nation’s economy, and the government believes that it can get people back to work and encourage business spending if tax rules are changed.

Corporate income tax has changed a great deal, and sales tax filing has become more complicated in certain states. Here are eight ways business taxes have changed in 2020, including the provisions of the CARES Act and some motions that were already in progress before the crisis began.

The Paycheck Protection Program (PPP)

The Paycheck Protection Program, part of the CARES Act, is intended to get American workers back on the job in the wake of the coronavirus pandemic. The program provides significant loans for companies that demonstrate that they are rehiring workers or putting money into their businesses.

The proceeds of a PPP loan are tax-free if the loan is forgiven up to set limits. Sole proprietors will also be pleased to hear that Economic Impact Payments are not subject to federal income tax and do not need to be reported.

Deferred Taxes

The usual schedule for remitting employment taxes has changed thanks to the CARES Act. Businesses are able to elect to defer the employer share of Social Security beginning on March 27, 2020, and continuing through the end of the year. If the election is made, 50 percent of the deferred amount must be made by the end of 2021. The remaining 50 percent must be paid by the end of 2022. If a business has received a PPP loan, they must stop deferring these taxes as soon as the loan is forgiven.

Carrying Back Losses

The CARES Act also permits corporate and individual taxpayers to carry back losses from the tax years 2018-2020 for five years. This is a generous provision because it allows corporations to amend their returns and reduce their taxable profits for pre-2018 tax years. The 2018 drop in the corporate income tax from 35 percent to 21 percent makes this a winning proposition.

Deductions for Pass-Throughs

The biggest change to tax law for 2020 that predated the CARES Act is a deduction for corporate and pass-through entities. A pass-through business is a small business that is structured as an S-corp, limited liability company or LLC, partnership, or sole proprietorship.

Pass-throughs comprise 95 percent of today’s American businesses. The new law entails a 20 percent tax deduction for these companies. However, service-based businesses like law and accounting firms over the income threshold of $315,000 cannot take advantage of this deduction.

Bonus Depreciation

Another advantageous tax change for American businesses concerns bonus depreciation. Today, the first-year bonus depreciation deduction is 100 percent. This means that businesses making purchases can deduct 100 percent of the purchase price from their taxes rather than dividing the depreciation cost over time. This will encourage businesses to spend money and stimulate the economy.

Net Operating Loss

Net operating losses are no longer carried back for two years as they have been in the past. Now, they can be applied infinitely going forward. Net operating losses occur when a business’s taxable income is less than its tax deductions. This comprises a tax relief potential for businesses, where owners can apply a net operating loss to future tax payments. This provision can be applied to 80 percent of taxable income.

Deductions for State Taxes

Businesses should be aware that only $10,000 can be deducted for state and local taxes in 2020. The other generous provisions of 2020 tax law may put businesses in the black, but it is worth noting that businesses cannot deduct as much of their state tax liability as they had in the past.

Sales Tax Changes for 2020

Sales tax filing remains complicated in most states. 25 states have made changes to their sales tax laws in 2020. For example, state tax rates in Alaska have remained at zero percent, but the local tax rates are now as high as 7.5 percent. In New Mexico, local sales tax rates vary greatly by county and district. They are topping 8 percent in many locations.

Keeping Abreast of Tax Changes

When companies are getting ready to file their taxes or engaging in future planning, they need to have a grasp on how changing tax laws can work in their favor. Having a dedicated tax consultant as well as a sales tax consultant can be a huge advantage for these businesses. Without expert help, it is possible that businesses could overpay their taxes, or in a worst-case scenario, find themselves in legal trouble for underpaying.