Business Income Tax Questions And Answers (Ultimate Guide)

business-income-tax-questions-answers

Business income tax (according to Investopedia) is an outcome of earned income and is classified as ordinary income for tax purposes.

It encompasses any income realized as a result of a company or individual operations.

In simple explanation it is a business entity’s net profit or loss, which is calculated as its revenue from all sources minus the costs of business expenditures.

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Income Tax Filing Tips for Business Owners in 2022:


Income Taxes for Businesses: The Basics Explained

What qualifies as a business that you must pay income taxes on?

According to the IRS website:

  • Your primary purpose for engaging in the activity is for income or profit.

  • You are involved in the activity with continuity and regularity.

All businesses must pay federal taxes on income by making regular estimated tax payments as income accumulates over the course of the year.


An employee who works for someone else has taxes withheld from paychecks.

However, a business owner does not get this option so he or she must estimate how much tax is owed based on current income and income projections.

Any remaining tax due on the year’s income must be paid when filing your return.

Learn more at

https://www.irs.gov/forms-pubs/about-publication-583


Q: What is self employment tax?

A: Self employment tax is social security and Medicare tax for individuals who work for themselves.

Payment of SE tax contribute to your social security coverage so you can receive retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Q: How to determine if you’re self employed?


A: Self employed individuals apply to the following:


  • Carrying on a trade or business as a sole proprietor or independent contractors

  • Belonging to a partnership that carries on a trade or business


Self employment includes part-time as well as full-time business.


Both must be reported as self employment tax.


Self employment tax refers to the Social Security and Medicaid taxes that self employed individual must pay, and is in addition to income taxes that a business owner is required to report to the IRS.

Self employment tax is calculated on schedule SE of your 1040 federal tax return form.

For special rules and exceptions, learn more here:


https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes


A business that has employees must also pay Employment taxes that cover the following:


  • Social security and Medicare taxes

  • Federal income tax withholding

  • Federal unemployment (FUTA) tax

Learn more about employment taxes on the IRS website here:

Employment Taxes | Internal Revenue Service (irs.gov)


Net Profit, or Net Loss?

In determining whether you’ll be paying self employment tax, you must first calculate your business earnings’ net profit or net loss.


Subtract business expenses from business income.


If your income exceeds your expenses, you must report the difference which is your net profit that you will report on page 1 of form 1040 or form 1040-SR.

A net loss can be deducted from gross income, also on page 1 of form 1040 or 1040-SR.

Q: What is the minimum amount you must earn as a business owner that requires you to file an income tax return?

A: The minimum is currently $400, except in certain circumstances which you can learn about in detail here:


https://www.irs.gov/forms-pubs/about-publication-334

Not sure if you’re required to make quarterly tax payments?

Run through the questions listed on form 1040-ES – Estimated Tax for Individuals, to determine:


https://www.irs.gov/pub/irs-pdf/f1040es.pdf

To make estimated quarterly payments on your taxes, find blank vouchers that are included with form 1040-ES, or get set up with EFTPS here:


https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system


Did You Know? Reduced Tax Rates for C-Corps

C-Corporations have the advantage of a reduced income tax rate that took effect in 2017.


Income tax rates dropped from 45% to a flat 21% for C-corps.

A business owner can potentially deduct 20% of qualified business income on their federal tax return in the case where the owner pays tax on the business, rather than the business paying tax itself.

This is known as pass-through income.

If you’re filing 2020 income taxes, legal, medical and accounting businesses get this total deduction reduced once their income hits $326,600 for joint filers or 166300 for individual filers.

If a business reports an excess of $426,600 then they do not get to take a deduction of this kind.

SOURCE:


9 Tax Tips for Small Business Owners in 2020 and Beyond (ml.com)



What to Do if You Owe Back Taxes as a Business Owner?



Business owners are tasked with the difficult responsibility of having to keep track of and pay quarterly taxes.

This is similar to the federal and state taxes that are withheld from the paycheck of an employee who works for someone else.


These taxes are set aside for the purpose of social security, Medicaid and disability.

Because taxes are not automatically deducted from a business owner’s income, the individual must make estimated quarterly tax payments over the course of the tax year.


After filing his or her federal tax return, the business owner will then have the estimated tax payments applied to the total income tax owed, as dictated by a wide variety of factors, which determines whether that individual will receive a refund from the IRS, or be expected to pay a remaining balance owed.

What happens if you don’t pay quarterly taxes?

Not every business is required to, but if you have concerns or questions about this you should take a look at the bounty of information available on the IRS website at http://irs.gov.

Chances are, you won’t get into huge trouble if you don’t pay your quarterly taxes, but you will get hit much harder with thousands of dollars owed at the end of the tax year.

So it’s a really good idea to stay on top of quarterly tax estimates, and make those payments in a timely fashion.


Plan Ahead: Set Aside an Income Tax Savings Account

Hit with a tax burden on 2020’s owed taxes?

Don’t make the mistake all over again in 2022.

Be proactive in setting up a savings account designed to set aside the anticipated percentage owed, so that you won’t find yourself sinking under the weight of double tax debt next year.

Set Up a Payment Plan

You might also consider setting up payment for quarterly taxes to ease the burden on your bank account.

Estimated taxes can be set up so that you’re potentially getting money back, rather than owing out when it comes time to report your income to the IRS.

An Accountant is a Business Owner’s Best Friend

Don’t know where to start when it comes to setting aside money for taxes, having distributions made, or paying quarterly taxes?

It may be worth the time, dollars and headaches saved to speak to an accountant who can help you set something up for your business.

CARES Act of 2020: What Taxpayers Need to Know

Searching for a way to use taxes to your benefit, especially if your business income has taken a hit?

You’ll find a ton of valuable information on the IRS website that provides details on the CARES act of 2020.

CARES stands for Coronavirus Aid, Relief and Economic Security Act, Publication L or CARES Act, enacted on March 27, 2020.


It will be of great benefit for all business owners as well as individual tax payers in general, to sit down with their accountant and go over the provisions so they can find out which benefits they may qualify for, including added tax credits, extensions, forgiveness on loan and IRA distribution penalties, and much more.

Below find an overview of tax related benefits to look for and learn about when filing your 2020 tax return.

Individuals who earn a low to modest income can take advantage of the CARES act provision which permits then to report 2019’s income rather than 2020’s, if 2020’s income is less than 2019’s income, in order to receive a greater amount of the EIC (Earned Income Credit).

Freelancers and independent contractors can apply for unemployment benefits under specific conditions, as a result of being unable to work due to the impact of COVID-19.

Business owners who experienced a drop in income due to Coronavirus can receive a benefit toward employee retention.

Taxpayers who took early distribution of retirement funds will be excused the additional 10% penalty for early withdrawal, as well as be given the option to repay the distribution amount over the course of 3 years.

In 2020, PPP or Paycheck Protection Program loans may be forgiven, with other conditions having been met in order to qualify.


These loans were designed to cover employee payroll among other costs.

The CARES act grants businesses a 6.2% deferral of social security payroll taxes incurred from March 27 to end of December 2020.

Q: Who qualifies for section 2202 of the CARES act?

A: You are a qualified individual if:

·You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

·Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

·You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

·You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

·You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service (irs.gov)

Certain taxpayers may be qualified to take a Coronavirus-related distribution for certain, eligible retirement plans.


Applies January 1, 2020 to December 30, 2020 to a limit of $100,000 for all IRAs and plans. Additional tax of 10% which is normally taken for early distributions does not apply to Coronavirus-related distributions.

Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service (irs.gov)

Tips for Business Owners to Use Taxes to Their Financial Advantage

Small Business Tax Workarounds for Tough Times:

Ask Your Accountant About These

Wondering how you can crunch the company numbers to make income taxes work in your best interest as a business owner?


If yours is a business model that takes cash payment from some customers, you can encourage your cash customers to pay early in order to get more money coming in for the current year.

Be Strategic About Business Expenditures and Taking Cash Payments

If you expect that your business profits will increase in the following year, you can put off business expenses until after January.


On the other hand, if you anticipate that your profits will be high for the current year, you can defer some of your company revenue until after January while paying business expenses in advance.

Lower Your Total Income: Donate to Charity

The amount of charitable donation that you can deduct from your total income would be the fair market value of whatever goods you donated.

NOTE: If you plan to take the standard deduction ($24,800 for married couples and $12,400 for individuals), charitable gift deductions are not permitted as part of your income tax filings.

In 2020, cash contributions can be deducted up to $300 to certain designated charities, even if you do opt to take the standard deduction.

Set Up a Tax Deductible Savings Plan for You or Your Employees

You can get a tax deduction for starting a retirement savings plan.

Small business owners can set up employer-sponsored retirement savings plans such as the SIMPLE IRA, SEP IRA, 401(k) and profit-sharing.

Contributions that you make either for yourself as a business owner or for your employees may be tax deductible.

You can also receive a tax credit to help with the cost of starting a certain type of retirement plan.

Making Large-Scale Equipment Purchases for Your Business?

Equipment that you purchase and then place in service before the end of the year may result in a sizable deduction on your total reported income.

For details on this, check the IRS website where you’ll find exact dollar amounts for the current year.

As a business owner, you’ll also be entitled to 100% bonus depreciation deduction on certain kinds of new and used equipment bought and placed in service after Sept. 27, 2017 (up from 50%).

Coronavirus Relief for IRA Distributions and Loans

Q: Does your IRA distribution qualify for coronavirus related relief from the 10% tax penalty for early withdrawal?

A: If you took an IRA distribution in 2020 it may be considered a coronavirus related distribution.

In this case, you would not be expected to pay 10% additional tax for early distribution.

You also would get the opportunity to repay all or part of a coronavirus related distribution to an eligible retirement plan, to repay within three years after the distribution was received.


Taxpayers will not owe federal income tax on the distribution if you paid within the three year time frame.


In this case, it will be treated as a direct trustee to trustee transfer.

So if you repay the full amount in 2022 to a retirement plan you can file an amended federal income tax return for 2020 and 2021 in order to claim a refund of the tax on the amount of distribution that you counted as income for those years, and you will not have to report the distribution as income for 2022.

Q: What Kind of Loan Relief is Offered in 2020 as Related to the Impact of Coronavirus?

A: Section 2202 of the CARES act provides that an individual or business owner who took out a loan in 2020 from their eligible retirement plan (excluding IRAs) can receive an additional year’s time to repay the loan.

If repayment on a loan is due from March 27th 2020 to December 31st 2020, the due date may be delayed for after a year from this time frame.

Payments made after this suspension period will be adjusted to reflect the delay and any interest accrued during the delay.

More information can be found in section 5.B of notice 2005-92


The 2020 CARES act provides that employers may increase the maximum loan amount available to qualified individuals.

The limit may be increased up to either $100,000 minus outstanding plan loans of the individual or the individuals vested benefit under the plan, applying to loans made from March 27th 2020 to September 22nd 2020.

Section 2202 of the CARES act permits a coronavirus related distribution for a 401K plan even if occurring prior to a permissible distribution event such as severance from employment disability or attainment of age 59 and a half.


Employee sponsored retirement plans do not apply here.

How can you be sure that you qualify for either the waiving of the 10% penalty on early distributions taken from an IRA or other qualifying account during coronavirus?

Please see the list of qualifications for meeting said criteria, on this page of the IRS website:


Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service (irs.gov)

Q: What Type of Proof is Needed to Take Coronavirus Related Tax Benefits?

A: Wondering what type of proof you’ll need to provide with respect to the impact of Coronavirus having affected your ability to work, meet expenses, and conduct business in 2020?


  • People who wonder if they need certification for meeting the requirement to receive Coronavirus related tax relief will discover that their truthfulness in meeting the stated requirements will suffice when presenting their case to a qualifying agency.


  • Section 2202 of the CARES act also makes allowance for expansion of their list of requirements that an individual or business would need to fall under in order to qualify for Coronavirus-related tax relief for the year 2020.

  • The IRS website states that upon request of the public to expand the list of criteria that must be met to qualify, the section is now under review and will be updated to reflect additional circumstances.

  • This is provided that the aggregate limit of $100,000 as the total distribution amount is not exceeded.

Paycheck Protection Program (PPP) Loans Under the CARES Act

PPP or Paycheck Protection Program loans, were initiated thanks to the CARES act, so that small business owners could take a loan out that would cover employee salaries and other expenses.

In 2020, these loans may be forgiven, with other conditions having been met in order to qualify.

To complicate the situation, expenses such as payroll costs, which are normally tax-deductible, do not qualify as a deduction if paid for using PPP proceeds.

Businesses can defer 6.2% of social security payroll taxes incurred between March 27 to end of December 2020, thanks to the CARES act. Fifty percent of deferred funds must be paid by December 31, 2021. The remaining 50% must be paid by December 31, 2022.

The CARES act grants certain types of small businesses net operating loss generated in 2018, 2019 and 2020 which can be applied to income from the past 5 years and which can result in an immediate refund.

Because of this, you may wish to incur more business expenses in 2020. For a quick refund, small business owners may wish to file a tentative refund claim.

Coronavirus Related Relief for Retirement Plans and IRAs

Section 2202 of the CARES act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans, such as section 401(k) and 403(b) plans, and IRAs), to qualified individuals.

Special rollover rules also apply.

The provision also increases the limit on an amount that a qualified individual may borrow from an eligible retirement plan (not including an IRA), and permits a plan sponsor to provide qualified individuals up to an additional year to repay their plan loans.

Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service (irs.gov)

Q: Has there been a tax extension created for individuals who have taken coronavirus-related distributions?

A: Yes, the taxable amount is permitted to be spaced out over 3 years. This means that you can claim 1/3 of your distribution amount in 2020, another third in 2021, and the final third in 2022.

Q: If I take a coronavirus-related distribution, can I repay it?


A: Those who wish to repay their Coronavirus-related distribution amounts may do so for either part or all of the total distribution amount, over the course of 2020, 2021 and 2022.

In doing so, you may also apply for a refund of the taxable amount that you paid on the distribution in 2020, and you will not be required to claim the repayment amount as distribution income in 2022.

Loan limits may be increased on the CARES act, under the provision that the loan was granted to a qualified individual during the time frame of March 27, 2020, to September 22, 2020.

Caps on the loan limit are either (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan.

Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service (irs.gov)

Q: Does a coronavirus-related hardship qualify you to take an early distribution on your 401(k), 403(b) or 457(b) plan?


A: Under normal circumstances, a 401(k) plan for example would not permit penalty-free distribution if it occurred prior to age 59.5, or without prior severance from employment or disability.

  • However, under the CARES act of 2020, Coronavirus-related relief permits early distribution without the prior mentioned criteria being met.

  • The CARES act does not, however, change limits on the timeframe that distributions become permissible from employee-sponsored retirement plans. An example of this is a money purchase pension plan.

Q: If an eligible retirement plan does not accept rollover contributions, does that stipulation change if a qualified individual wishes to repay a coronavirus-related distribution:

A: No, if the retirement plan does not initially accept rollover contributions, then the person who has opted to repay their coronavirus-related distribution amount back into the retirement plan should not expect that the plan’s stipulation will change to accommodate the wish, even as the individual would be permitted to repay the distribution.

Q: What is the process for reporting Coronavirus-related IRA distributions and redistributions?


A: Redistributions is the term referring to the repayment of distributions, which are permitted to take place over the course of a maximum of 3 years.

Taxpayers are requested to use IRS form 8915-E to report both coronavirus distributions in 2020, and redistributions over the course of the next 2 years.

Q: What is the maximum amount that you can report on your 2020 federal income taxes with regard to the coronavirus-related early distribution of retirement funds?


A: The maximum amount that you can claim cannot exceed $100,000.

Helpful Tips:

Try out the Tax Credit Calculator from Turbo Tax:

https://blog.turbotax.intuit.com/self-employed-coronavirus-relief-center/

·Available for employers and self-employed

·Estimate how much cash you can get from ERC, paid leave, and a tax deferral

·Retain employees and you might qualify for a credit of up to $5,000 per employee

Q: How much money can you get from new tax credits?


1. Employee Retention Credit (ERC): Up to $5,000 per employee.

2. Leave tax credit: Cover missed work for a broad spectrum of COVID-19 related reasons. Up to $15,110 per employee.

3. Social Security tax deferral: Helps you keep more money now and defer the payments to a later date.

Employee Retention Credit (ERC) under the CARES Act

Amount: Claim credits up to $5,000 per employee for all calendar quarters.

When: Reduce your federal employment taxes whenever you process your next payroll.

How do I claim the credit?


Report qualified wages on your federal employment tax returns, usually Form 941.

Unemployment Benefits and Insurance


·The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded unemployment benefits to Self-Employed who are usually ineligible for unemployment benefits.

Summary of the New Coronavirus Relief Package for 2021

Second direct stimulus payments are being issued or have already been issued for millions of Americans in response to the Coronavirus crisis. Amounts are up to $600 for individuals, $1200 for joint taxpayers, and $600 for each dependent child under age 17 in early 2021.

The full recovery rebate is available for people who qualify based on a reported annual income of up to $75,000.


Q: What is AGI?

A: “AGI” stands for adjusted gross income. This covers wages, salary and interest minus adjustments for student loan interest or IRA deductions.

Taxpayers who do NOT qualify for the current stimulus check issued in winter of 2021 include single filers who have no qualifying dependents and an income of $87,000, and $174,000 for married joint filers with no dependents.


Mixed-status households with different immigration and citizenship status will be eligible.

This new provision will also be retroactive which means that individuals who weren’t eligible for the first stimulus package can apply to receive a retroactive payment that applies for the 2020 tax year.

More details can be found on the Turbo Tax website here:

https://blog.turbotax.intuit.com/tax-news/wheres-my-second-stimulus-check-48658/


2021 stimulus payments were mailed out on January 8, so if you have not received yours, check the IRS Get My Payment tool – explore this page of the Turbo Tax blog for more detail:

https://blog.turbotax.intuit.com/tax-news/wheres-my-second-stimulus-check-48658/


Unemployment benefits have been extended in 2021. Payments will increase by $300 per week and benefits will extend until March 14, 2021.

NEW!

Unemployment Allowance for Self Employed Freelancers in 2020


  • Self Employed, Freelancers and Side Giggers who make at least $5K per year in self employment income can apply for PUA (Pandemic Unemployment Assistance) which means that if you worked as an independent contractor in prior years but did not qualify for unemployment, you may be able to reapply in 2021.

  • Details of your employment status, including whether or not you also have an employer, will determine whether or not you are eligible for such payments.

Earned Income Credit Revised to Accommodate Lower Wages in 2020

Earned Income Tax Credit helps working people who have low to moderate income.

The average EIC tax credit was $2476 per filer in the 2019 tax season.

This year, American taxpayers filing their 2020 returns will be able to take advantage of EIC benefit that they were not eligible for in 2019, plus take the credit offered for 2020 income filing.

What this means: lower income individuals can use their earned income from 2019 to determine their EIC tax credit, as well as the refundable portion of their Child Tax Credit, in 2020.

SOURCE:

New Coronavirus Relief Package: What Does it Mean for You and a Second Stimulus Check | The TurboTax Blog (intuit.com)

Paycheck Program Expanded for Small Businesses and Eligible Non-Profits


Here’s some important tax benefit information for small business owners on the expanded Paycheck Protection Program for Small Businesses and Eligible Non-Profits.

The Emergency Coronavirus Relief Act of 2020 makes self employed individuals, small businesses, small 501(c)(6) organizations, restaurants, live venues and EIDL grants eligible for a second round of payments under the PPP (Paycheck Protection Program).

If your business has experienced a severe reduction, you are also eligible for a second PPP loan.

Details: 25% of revenue loss in any fiscal quarter of 2020 for a business with 300 or fewer employees and small 501(c) organizations with 150 employees or fewer would be eligible for the PPP program under the COVID-19 emergency relief package.

More info available here:

New Coronavirus Relief Package: What Does it Mean for You and a Second Stimulus Check | The TurboTax Blog (intuit.com)

Coronavirus Relief: Paid Leave for Contractors

Facility closures and restrictions which prevented outsourced contractors from working could permit those taxpayers to be reimbursed for paid leave.


Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act

  • Q: How may retirement plans report coronavirus-related distributions?

  • Q: How may individuals report these distributions on their federal income tax returns?

The following applies to section 2202 of the Coronavirus Aid, Relief and Economic Security Act, Publication L or CARES Act, enacted on March 27, 2020.

Applies to: qualified individuals and retirement plans

Coronavirus-related distributions are not subject to the additional 10% penalty tax, including 35% additional tax for certain distributions from SIMPLE IRAs


  • Can be includable in income over a 3- year period

  • Is, to the extent that the distribution is eligible for tax-free rollover treatment, contributed to an eligible retirement plan within a 3-year period, will not be includible in income.

  • Allowable loan amount increases

  • Permits a suspension of payments for plan loans outstanding on or after March 27, 2020 for qualified individuals.

Q: Distributions: What retirement plans does the CARES act apply to?


  • Individual retirement arrangements (IRAs) under 408(a) or (b)

  • A qualified plan under 401(a)

  • An annuity plan under 403(a)

  • A 403(b) plan

  • A governmental deferred compensation plan under 457(b)

The listed plans may have distributions included in the individual taxpayer’s gross income in the year of the distribution.

Applying to: distributions from 403(b) plans under 403(b)(8) and governmental 457(b) plans under 457(e)(16)

Section 402(c)(4) states that in the case of qualified plans, any distribution of all or part of a balance to the credit of an employee is an eligible rollover distribution with certain exceptions, which include:

Substantial equal periodic payments over the course of a period of at least 10 years, or for the life expectancy of the employee.


  • Minimum distributions required under 401(a)(9);

  • Any distribution made upon hardship of an employee.

  • Generally, any distribution from an IRA is eligible for a rollover except the following:

  • required minimum distribution; or

  • certain distributions from inherited IRAs

  • No minimum distribution amounts are required in 2020, for eligible retirement plans other than defined benefit plans.

SOURCE: n-20-50.pdf (irs.gov)

Business Tax Tips for 2020 Filing with Coronavirus Tax Relief

The Taxpayer Certainty and Disaster Relief Act of 2020 was enacted on Dec. 2, 2020.

This act modified the Employee Retention Credit or ERC.

This makes it easier for businesses to retain employees by offering them a refundable tax credit against the employer share of Social Security Tax equal to 70% of qualified wages paid to employees after December 31, 2020, through June 30, 2021.

Maximum ERC amount available is 7K per employee per quarter of the year. Qualified wages max out at $10,000 per employee per quarter.

Employers can access the ERC (Employee Retention Credit) for the first and second quarters of 2021 after first reducing employment tax deposits.

Employers with 500 or fewer full-timers in 2019 can request advance payment of the ERC using form 7200, Advance of Employer Credits Due to Covid-19, subject to certain limits.

Eligibility for the ERC effective January 1, 2021 is as follows:

Employers who operate a trade or business and experience either full or partial suspension of the operation as a result of government orders limiting commerce, travel or group meetings due to COVID-19.

Decline in gross receipts of a 2021 calendar quarter in which gross receipts of that quarter total less than 80% of the gross receipts of the same quarter in 2019; and a decline of 50% as compared to gross receipts of the same quarter in 2020.

If the employer did not exist in 2019 then they can use the corresponding quarter in 2020.

For the first and second calendar quarter of 2021, employers can elect to measure the decline of gross receipts by using the immediate preceding quarter.

Qualified wages that apply to the ERC (Employee Retention Credit) are those wages paid to employees who are not able to provide services because the operations were fully or partially suspended; or due to a decline in gross receipts.

Employers that averaged fewer than 500 employees in 2019 count qualified wages that apply to the ERC as those wages paid to employees during a period where operations were fully or partially suspended; or during a quarter where there was a decline in gross receipts regardless of whether the employees provided services.

The new law permits that employers who received PPP (Paycheck Protection Program) loans can now claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.


Small Business Tips: Filing Your 2020 Income Taxes

Q: When are federal income taxes due in 2021?


A: April 15, 2021 is the federal income tax due date for 2021 – same for individuals as for businesses. In the case of S corporations and partnerships, the due date is a month earlier, on March 15, 2021.

Most businesses and self employed individuals should submit estimated quarterly tax payments, in addition to filing an annual tax return.

Tax filing deadlines vary for corporations.

Q: When are your state taxes due?

A: This varies according to the state, so check with your local tax collection authority.

Q: When are quarterly estimated taxes due in 2021?

A: Quarterly taxes for 2021 are due on the following dates:

First quarter: April 15

Second quarter: June 15

Third quarter: September 15

Fourth quarter: December 15

IRS Form to use: 1120-W

Employment tax changes for 2020 filing:

Businesses have been permitted to defer withholding the employee’s share of payroll taxes on wages paid between September 1, 2020 and December 31, 2020.

An additional option was granted to defer the employer’s share of payroll takes starting March 27, 2020.

Payroll taxes that were withheld should be paid by April 30, 2021.

To make up for the deferred amount, additional payroll taxes should be withheld from employee checks for the first four months of 2021.

Q: When should paper tax forms be distributed to employees in 2021 for the 2020 tax year?

A: January 31, 2021 is the deadline for the following tax forms to be distributed to employees:


  • Forms 1097, 1098 and 1099

  • Forms 3921 and 3922

  • Forms W-2 and W-2G

February 28, 2021 is the deadline to submit the same forms to the IRS.

Q: What is the Deadline for a Business to Submit Paper and Electronic Employee Forms?


This question refers to the distribution of paper tax forms or employee-consented electronic records to individuals who received cash payments in 2020 that included wages, non employee compensation, dividends, royalties and profit sharing distributions.

March 31 is the extended deadline for the following forms:

  • Form 1096, Annual Summary and Transmittal of U.S. Information Returns

  • Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips

Partnerships and S Corporations must submit tax returns by either March 15, 2021, or on the 15th day of the third month after the end of your organization’s tax year.


SOURCE:

2021 Federal tax deadlines for your small business (hiscox.com)


Federal Income Taxes: Payment Options


The IRS offers many convenient federal income tax payment options. Whether you’re wondering about paying quarterly estimated taxes for business owners, sending payment for the amount owed on your 2020 tax return, or setting up a payment plan that lets you get caught up on back taxes owed, you’ll find an array of safe, convenient and reliable options listed below.

Direct Pay Using Your Bank Account:

This includes the option to pay your taxes as due on From 1040, estimated taxes and other forms directly from your bank account.

There is no cost to set this up or make payments.

Track your payments by signing up with your email address.

You’ll receive a confirmation number via email that enables you to look up your payment, as well as modify, cancel and look up your payment history.

Pay by Credit or Debit Card

No matter if your invoice is issued by e-file, paper file, or a physical bill or notice, you’ll be able to pay the IRS using your credit or debit card using one of three online payment processors.

These include ACI Payments, Inc, Pay1040 or PayUSATax

What About an Individual Payment Plan?

Qualified taxpayers and authorized representatives (Power of Attorney) are eligible to sign up for individual payment plans to space out tax payments over the course of a short term of 120 days or less, or a long-term payment plan consisting of monthly installments.

EFTPS (Electronic Federal Tax Payment System)


The US Department of Treasury offers a free, secure way to pay your taxes electronically using your Tax Identification Number (SSN or EIN), PIN and password


This system offers the convenience of scheduling payments up to a year in advance, submitting payment at any time, 24/7, paying income, employment, estimated and excise federal taxes, editing or changing scheduled payments, tracking payments with email notification, reviewing 15 months of payment history, and obtaining help from customer support.

To learn more and enroll, visit the EFTPS website here:

http://www.eftps.gov/


Electronic Funds Withdrawal Payment:

Individual and business filers can e-file and e-pay in a single step.

There is no fee to use this feature when filing and paying your taxes in one step.

Your bank account number is entered into a secure online system and the need for a payment voucher is eliminated.

You can also use the Electronic Funds Withdrawal Payment system to make quarterly estimated tax payments.

Submit up to 4 quarterly payment using Form(s) 990-PF, 990-T, 1041 (1041-ES), and 1120/1120-F/1120-S/1120-POL.

You will be able to submit bank information and update as needed.

Same-Day Wire

As a taxpayer, you can contact your financial institution to see if you qualify to make a wire transfer payment to the IRS.


You’ll find a worksheet on the IRS website to help you get started:

https://download.eftps.com/SameDayPaymentWorksheet.pdf

International Wire Transfers can be made as well. Learn more on this page:

https://www.irs.gov/individuals/international-taxpayers/foreign-electronic-payments


Q: Should a Small Business Owner File for an EIN?

A: An EIN, or Employer ID Number, is necessary if you answer YES to the following questions:

Do you have employees?

Do you file any of these tax returns: Employment, Excise, Alcohol, Tobacco, Firearms

Do you withhold taxes on income, other than wages, paid to a non-resident alien?

Do you have a Keogh plan?

  • Are you involved with trusts, except grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns

  • Estates

  • Real estate mortgage investment conduits

  • Non-profit organizations

  • Farmers’ cooperatives

  • Plan administrators


Learn more and apply for an EIN at

https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein

SOURCE:

Do You Need an EIN? | Internal Revenue Service (irs.gov)


Coronavirus Tax Relief for Businesses:

What type of tax relief can business owners expect in 2020 in response to the Coronavirus crisis?

Credit for Sick and Family Leave

An employee who is unable to work, including telework, who has been quarantined or is self quarantining as a result of Coronavirus symptoms and seeking medical diagnosis, is entitled to paid sick leave up to 10 days (80 hours) at their regular pay rate or higher, Federal minimum wage or applicable State or local minimum wage, up to $511 per day but no more than $5,110 total.

Caring for Someone With Coronavirus

An employee who is unable to work as a result of having to care for someone with Coronavirus, or caring for a child because the school or day care facility is closed or the child care provider is unavailable due to coronavirus, is entitled to up to 2 weeks of sick pay (up to 80 hours) at 2/3 their regular rate of pay or if higher, Federal minimum wage or applicable state or local minimum wage, up to $200 per day but not to exceed $2K.

Caring for Children Due to Daycare or School Closure

Grants up to $200 per day and $10,000 in total. Up to ten weeks of qualifying leave can be counted towards the family leave credit.

Employee Retention Credits are available to employers in the form of a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through December 31, 2020.

Use form 7200 to apply for advance payment of employer credits due to covid-19. https://www.irs.gov/forms-pubs/about-form-7200


Credit for Sick and Family Leave and the Employee Retention Credit:

Please see the Business Relief Tax Tool to determine if a business qualifies.
https://taxpayeradvocate.irs.gov/BizTaxReliefTool


Tips for Filing Federal Income Taxes Using Form 1040 or 1040-SE and Associated Forms

Below please find general information on which forms are necessary to file federal income taxes.

Form 1040 is the main income tax form, with a version (1040-SR) for senior citizens and another version for non-resident aliens (1040-NR).

If you have more detailed tax questions and need additional forms as well as wish to procure the most updated information, visit the IRS website at http://irs.gov

Form 1040: US Individual Income Tax Return


Annual income tax return filed by citizens or residents of the United States.

Form 1040:


https://www.irs.gov/pub/irs-pdf/f1040.pdf


Instructions for form 1040:

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

Schedules for form 1040:


https://www.irs.gov/forms-pubs/schedules-for-form-1040

Schedule A: Itemized Deductions

Every tax payer, business owner or not, will want to itemize deductions from their reported income at tax time.

Common deductions that most individuals may take include the following:

  • Total mortgage interest that you’ve paid for that year – learn more about form 1098 which comes from your mortgage company, here: https://www.irs.gov/forms-pubs/about-form-1098

  • Child care expenses

  • Medical and dental expenses for you, your spouse, your dependent children or other dependents except in certain circumstances

  • Taxes you’ve paid, including either a general state and local sales tax deduction OR taxes from the below list (but not both):

  • Taxes withheld from your salary (or estimated taxes paid if you’re a business owner) for the currently filed tax year

  • State and local income taxes paid in 2020 for a prior year

  • Mandatory state fund contributions you’ve made

  • Mandatory family leave programs you’ve contributed to

  • Charitable donations of automobiles, boats or planes

  • Sales tax on goods - if the tax rate was the same as the general sales tax rate, you can deduct the actual state and local general sales taxes on expenses. Examples: Food, clothing, medical supplies, motor vehicles. Receipts must be shown).


Apply any tax refunds you received in the prior year’s taxes to this year’s reported tax that you paid, unless the refund was for a prior year’s purchase.

Alternatively, you can figure your state and local general sales tax deduction using the 2020 Optional State Sales Tax Table and Optional Local Sales Tax Tables.


Use this worksheet to determine if this will work for your situation:

https://www.irs.gov/SalesTax

Divorced or separated individuals will need to work out the details of who claims child dependents on their tax return.


Details can be found here:

https://www.irs.gov/pub/irs-pdf/p504.pdf

Coronavirus Taxpayer Relief for Form Deadlines

An extension of deadlines for certain tax-related forms, schedules and income tax dues has been extended in response to the Coronavirus crisis.

Learn more about those extended deadlines here:


Taxpayer Relief for Certain Tax-Related Deadlines Due To Coronavirus Pandemic | Internal Revenue Service (irs.gov)

Download the form here:

https://www.irs.gov/pub/irs-pdf/f1040sa.pdf

Download instructions here: https://www.irs.gov/instructions/i1040sca

Schedule B: Interest and Ordinary Dividends

Schedule B of Form 1040 covers Interest and Ordinary Dividends. Fill out schedule B to itemize the following income types:

  • More than $1500 of taxable interest or ordinary dividends

  • Seller-financed mortgage interest

  • Bond interest

  • Interest or ordinary dividends as a nominee

  • Other types of interest and dividends – see the full list on this page:


About Schedule B (Form 1040), Interest and Ordinary Dividends | Internal Revenue Service (irs.gov)

Schedule C: Itemized Deductions

Sole proprietors of either a part-time or full-time business should fill out form C to itemize business deductions. Schedule C of Form 1040 is where you’ll show business profit and loss on your income tax return.

Details to include on Schedule C as a sole proprietor of a business include:

Name, social security number, EIN if you have employees, business name, address.

You’ll also fill out gross receipts or sales, cost of goods sold, and other income related to the business, such as gas credits or refunds you may have received.

Expenses to itemize on Schedule C include:

  • Advertising

  • Car and truck expenses

  • Commissions and fees

  • Contract labor

  • Depletion

  • Depreciation

  • Employee benefit programs

  • Insurance

  • Interest

  • Mortgage paid to banks

  • Legal and professional services

  • Office expenses

  • Pensions and profit-sharing

  • Rent or lease

  • Machinery, vehicles, equipment

  • Other business property

  • Taxes and licenses

  • Travel and meals

  • Utilities

  • Wages

  • Other expenses

  • Expenses for business use of your home based on square footage used

Download Schedule C for your 2020 tax filing purposes right here:


https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Instructions for Schedule C can be found here:

https://www.irs.gov/instructions/i1040sc


Form 1099-misc

Form 1099-misc is important if you as a business owner have paid individuals at least $600 for things such as rents, prizes and awards, income, medical and healthcare, attorneys, and several other types of payments.


You should also use this form to itemize $5000 or more of consumer products that you paid to a buyer for resale.

Form 1099-misc is here:

https://www.irs.gov/pub/irs-pdf/f1099msc.pdf

Find instructions for form 1099-misc here:


https://www.irs.gov/instructions/i1099msc

Earned Income Credit and Coronavirus Relief

Low to modest income-earners can get a tax credit or increase their refund by using the Earned Income Credit calculation to reduce the total amount of their reported income.

Explore details on whether you can claim this tax credit with a qualifying child.

Also check the rules for divorced and separated parents, and how a particular custody situation may or may not qualify you for the credit.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides that tax payers who made less income in 2020 than they did in 2019 can report your 2019 amount in the EIC section of your 2020 tax return.


Details can be found here:

Schedule EIC for tax credit: https://www.irs.gov/pub/irs-pdf/f1040sei.pdf

Form 8862: https://www.irs.gov/pub/irs-pdf/f8862.pdf

Additional forms for child tax credits and other dependent tax credits can be found on this page of the IRS website:

child related tax benefits comparison | Earned Income Tax Credit (irs.gov)

Business and Individual Tax Preparation Checklist

Run through this helpful list of source documents that you’ll need to gather and submit to your accountant or tax preparer when filing your US federal income taxes.

Please note special items of interest as pertaining to the CARES act of 2020 and coronavirus-related tax credits and other benefits.

Provide the following source document information as applicable:

- Driver license numbers & dates of issuance & expiration

- Social security cards, marriage license or other identifying documents as may be needed from your tax preparer

- A copy of your divorce decree if applicable

- Forms W-2 for wages, salaries and tips, & gambling winnings

- Business income records and Profit and Loss statements as applicable

- Receipts for business related purchases

- Business related payment records

- Copies of closing statements regarding the sale or purchase of real property

- All Forms 1099 for interest, dividends, retirement, miscellaneous income, unemployment, Social Security, state or local refunds, etc.

- Receipts for paid childcare

- Brokerage statements showing investment transactions for stocks, bonds, virtual currencies, etc.

- Schedules K-1 from partnerships, S corporations, estates and trusts

- Statements supporting educational expenses, deductions or distributions, including any forms 1098-T, 1098-E, 1099-Q, 5498-QA, & 1099-QA

- All forms 1099-SA, 5498-SA, for health savings accounts, & 1095's A/B/C for health insurance coverage, premiums paid & tax credits received

- Printouts from doctors & pharmacies for medical & prescription expenses summarized with yearly totals

- Medical records diagnosing COVID-19 as applicable

- IRS notice 1444 showing the amount of Economic Impact Payment (STIMULUS) received in 2020

- All forms 1098, & 1098-C supporting deductions for mortgage interest, taxes, and charitable contributions

- Military discharge paperwork

- Legal papers for adoption, divorce, or separation involving custody of dependent children

- Any tax notices sent to you by the IRS or other taxing authority

- A copy of the prior 2 years’ tax returns, as applicable and if needed

CLOSING REMARKS

PLEASE NOTE: This information was compiled based on information found on the IRS website, Turbo Tax website, and several articles from authoritative sources published in early 2020.

The details included here represent a condensed version of information available to US taxpayers on the IRS website.

You are advised to visit the IRS website at:


http://IRS.gov for complete as well as the most accurate, up-to-date information.

IT IS STRONGLY RECOMMENDED that you consult with your business or personal account and financial institutions/advisors on matters concerning your federal (as well as state) tax filing details and payment status.

For the most favorable outcome in filing your US federal taxes and issuing payments, we advise that you gather all necessary information and speak to the appropriate authorities well in advance of the federal income tax due date for the year in question.

The information contained here does not apply to state tax rules and regulations for your individual state or local government.

YOU WILL FIND THE MOST UP-TO-DATE US TAXPAYER FILING INFORMATION ON THE IRS WEBSITE AT:


https://www.irs.gov