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Hellish tax season is just around the corner for small businesses that have benefited from the CARES law.
"The CARES provisions are all helpful to small businesses, but they will make tax planning efforts difficult for years to come," said Holly Wade, director of research and policy analysis for the National Federation of Independent Business.
Heading into winter, half of small business owners are still in survival mode, but they are beginning to understand how difficult tax compliance will be over the next year, said Tom Sullivan, vice president of small business policy at the U.S. Chamber of Commerce.
“The fear for small business owners is just beginning to emerge,” he said. "They don't make decisions based on the tax code, but they understand that April filing season could be a nightmare."
Indeed, pandemic relief legislation that went into effect this spring introduced paycheck protection loans, the employee loyalty loan, and paved the way for entrepreneurs to convert losses into cash.
However, the aid comes with added tax complexity for 2020 and some pain when it comes time to apply in the spring.
If ever there was a time for business owners to hire an accountant, this is the time.
Issues with PPP deductibility
The most immediate problem facing businesses is the deductibility of expenses paid on a forgivable PPP loan.
The IRS has confirmed that the loans are tax-free if at least 60% of the proceeds are used for payroll.
However, the costs covered by PPP loans cannot be deducted from 2020 tax returns.
The IRS argues that recipients would get a double benefit if they deducted the expenses paid by the government.
The CNBC | SurveyMonkey Small Business Survey for the fourth quarter of 2020 has broad support for another round of Covid-19 incentives and relatively high support from small business owners from both political parties for more funding from the Paycheck Protection Program.
Q4 2020 CNBC | SurveyMonkey Small Business Survey
While technically true, it also effectively makes the loan taxable provided that other business income is taxed more fully.
"If freeing up capital is a top priority for businesses, the government should free up capital," said Sullivan of the Chamber of Commerce.
"A double benefit is exactly what Congress intended and needs to be notified to the IRS that these expenses are still deductible," he said.
Both Sullivan and Wade are standing up for Congress to address the situation.
Interactions between PPP and other tax breaks
Even if this major problem for small businesses is positively resolved, it will remain an enormous challenge to take advantage of and comply with other changes in tax legislation.
"It's not just that the tax code is complicated," said Victoria Glover, partner in Deloitte's national tax office. "The IRS has issued a lot of guidance this year and taxpayers must follow all of these."
For example, from March 13th through the end of the year, PPP loan recipients cannot claim an employee retention tax credit equal to 50% of the qualifying wage paid to employees – or up to $ 5,000 per employee.
"Small business fear is just beginning to emerge," Sullivan said.
Head of Small Business Policy at the US Chamber of Commerce.
Employers taking out a PPP loan can also defer their portion of the social security tax until the end of the year.
"There are a number of interactions between the provisions of the CARES Act," said Glover.
"It all depends on the facts and circumstances of each taxpayer," she said. "People need to talk to their tax advisors about how parts of the CARES law interact with each other and with the rest of the tax law."
Find a professional
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Getting the help of an expert is easier said than done for sole proprietorships and small partnerships, said Wade of the National Federation of Independent Business.
"Most employers use a tax advisor, but the smaller the company, the less communication they have with them," she said.
"It's intimidating and they don't know what questions to ask," said Wade. "Even with a tax professional, these problems are difficult to solve."
Wade fears that many small business owners will not take advantage of the CARES Act because they are too daunting to find out.
"It takes more paperwork and time that they don't have in a day," she said.
Here are four questions to help prepare for your year-end meeting with your tax advisor.
- What should I do or think about to prepare for our meeting? Keep accounting records and document your use of PPP funds. This will make things easier for your CPA or accountant.
- What are some common mistakes small business owners typically make when preparing their taxes? This is not the year to go it alone. Do you know some of the major stumbling blocks for entrepreneurs.
- What tax changes over the past year could affect my business? The CARES Act introduced emergency funding for small businesses that affects your tax return.
- What are the typical deductions and credits for a company like mine that may apply to me? The depreciation and recoverable claims that you can make will be based on the specifics of your company.