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A hellish tax season is fast approaching for small businesses that have received assistance under the CARES Act.
“The provisions of the CARES Act are all useful for small businesses, but they will complicate tax planning efforts over the next two years,” said Holly Wade, Federation director of research and policy analysis. national independent business.
As winter approaches, half of small business owners are still in survival mode, but they are starting to understand how difficult tax compliance will be next year, said Tom Sullivan, vice president of small business policy in the United States Chamber of Commerce.
“Anxiety is just starting to show up for small business owners,” he said. “They don’t make decisions based on the tax code, but they understand April’s filing season could be a nightmare.”
Indeed, the pandemic relief law that became law this spring established Paycheck Protection Program loans and employee retention credit and paved the way for entrepreneurs to turn their losses. in silver.
However, with the help comes additional tax complexity for 2020 and some pain when it comes time to file a return in the spring.
If there’s ever been a time for business owners to hire a tax professional, this is it.
The most immediate problem for businesses is the deductibility of expenses paid with a repayable PPP loan.
The IRS has confirmed that the loans are eligible for tax-free remission if at least 60% of the proceeds are intended for payroll.
However, the expenses covered by PPP loans cannot be deducted on 2020 tax returns.
The IRS argues that beneficiaries would receive a double advantage by deducting the expenses paid by the government.
The CNBC survey | SurveyMonkey Small Business Q4 2020 reveals widespread support for another round of Covid-19 stimulus and relatively high levels of support among small business owners from both political parties for increased funding for the paycheck protection program.
Q4 2020 CNBC | SurveyMonkey Small Business survey
While technically true, this also makes the loan taxable to the extent that other business income will be more fully taxed.
“If the top priority is to free up capital for business, the government should free up capital,” said Sullivan of the Chamber of Commerce.
“A double benefit is exactly what Congress intended and the IRS should be made aware that these expenses are still deductible,” he said.
Sullivan and Wade are lobbying Congress to remedy the situation.
Even if this huge problem is resolved favorably for the small business community, profiting from and complying with other tax code changes will remain a huge challenge.
“It’s not just that the tax code is complicated,” said Victoria Glover, partner at Deloitte’s national tax office. “The IRS has issued many guidelines this year and taxpayers must follow everything.”
For example, recipients of PPP loans cannot claim the Employee Retention Credit, a credit equal to 50% of eligible salary paid to employees – or up to $ 5,000 per employee – from March 13 through the end of the year. year.
Employers taking out a PPP loan can also choose to defer their share of the social security tax until the end of the year.
“There are a number of interactions between the provisions of the CARES Act,” Glover said.
“It all depends on the facts and circumstances of each taxpayer,” she said. “People need to talk to their tax advisers about how parts of the CARES act interact with each other and with the rest of the tax code.”
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Getting expert help is easier said than done for sole proprietors and small partnerships, said Wade of the National Federation of Independent Business.
“Most employers hire a tax professional, but the smaller the business, the less contact they get,” she said.
“It’s intimidating and they don’t know what questions to ask,” Wade said. “Even with a tax professional, it is difficult to manage these problems.”
Wade worries that many small business owners fail to take advantage of the provisions of the CARES Act because they are too daunting to understand.
“It involves more paperwork and time than they don’t have in a day,” she said.
Here are four questions to prepare you for your year-end meeting with your tax professional.
- What should I do or think to prepare for our meeting? Maintain solid accounting and be sure to document your use of any P3 funding. This will make things easier for your CPA or accountant.
- What are some common mistakes small business owners make when preparing their tax returns? This is not the year to go it alone. Know some of the main obstacles for entrepreneurs.
- What tax changes in the past year could impact my business? The CARES law has emergency funding in place for small businesses, and this will affect your tax return.
- What are the typical deductions and credits for a business like mine that may apply to me? Write-offs and refundable claims you can make will be based on the specifics of your business.