As the COVID-19 pandemic continues, the effects of which are still being felt in new areas. Because of the shutdown, our country’s economy dropped drastically. The government passed the CARES Act to lessen the impact on the US economy.
To keep small businesses alive, there were programs and relief packages in place to keep them from closing their doors completely. It’s due to these programs that there are tax implications.
PPP (Paycheck Protection Program) Loans
The PPP loan allowed small businesses to continue paying their employees. They would in turn keep buying essential and desired goods, thus keeping the economy moving.
One of the biggest aspects of this loan was that it was forgivable. If you used it according to the guidelines, you would not need to pay it back nor would be considered taxable income.
If you did not use the loan how it was intended, you’d have to pay it back and it would be taxable income.
You may be used to deducting business expenses, but you need to understand that if you used funds from PPP to pay for these expenses, which is a requirement of the loan, you cannot deduct them.
This is an interesting one. Having tax implications for living in one state but working in another is nothing new. But what if you are forced to work at home in the same state you live in without ever going to the office?
I wish there were a clear-cut, one-size-fits-all solution here, but your answer is going to depend on the state where your business is registered. The Department of Revenue for each state should put out guidelines to help you proceed. Here is an example of what South Carolina put forth.
Please note that your taxes will only be affected if your employees live/work in a state outside of where your business is registered. If your employees work from home in South Carolina, and your business is in South Carolina, there should be no additional taxes to consider.
Taxes on Unemployment Benefits
Because of the shutdown, there is a strong possibility you or your employees lived off unemployment benefits. To make things slightly more complicated, there wasn’t only state-level unemployment insurance, there were three others.
Regardless of which you received, these benefits are taxable.
Though this is not an ideal outcome for anyone, you may have done something during the year to significantly increase your chances of getting a sales tax audit.
Some small business owners have been charging their customers additional cleaning surcharge due to the extra measures and risks they are taking by being open.
The problem with this is that this fee, when it is not voluntary, is subject to sales tax. And even if your small business did calculate the proper taxes to pay for the additional fees, it’s not a guarantee that you did them properly. The increased likelihood of you making a mistake would also expose your business to a sales tax audit.
Combine this with your state’s need for income due to the pandemic. The more your business is making, the more you owe. So you are bringing in money—even if it is a minor charge—you owe those taxes.
Small businesses, like restaurants, might be opening themselves up to even more risk because of how much cash they take in, especially if there is a bar. The risk isn’t because of your employees doing something wrong, it is because of how easy it is to not account for all the cash coming across the bar.
There is one way to avoid this audit and still possibly receive a COVID-19 surcharge: make it voluntary.
When you tip someone, it is not included as a sales tax. This isn’t to say they aren’t taxable, but tips do not fall under a sales tax. Online retailers have already done this. Some of them ask their customers if they are willing to pay a COVID-19 surcharge. If they opt into it, it gets treated as a voluntary tip and therefore not subject to sales tax.
Again, tips are taxable. But they are not taxed as part of a sales tax. If you are going to have a surcharge, make it voluntary and limit your risk about facing a possible sales tax audit.
Manage and track every dollar that leaves your business. When it comes time to pay your annual taxes, you’ve already done the legwork because you’ll have done the smart thing by maintaining the right documentation.