4 Tax Moves Small Business Owners Should Consider During Economic Downturn
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By: Wendi Williams of Incfile
The last few months have served as a wake-up call for small business owners and a reminder that no matter how successful you are, your situation can change on a dime. As we approach the July 15 extended tax filing deadline, many small business owners wonder how they can offset their current losses and better prepare their finances for whatever surprises the economy has in store in the coming years.
On March 27, 2020, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to support American citizens, small business owners and employees in the midst of an unprecedented time in our history. The goal of the CARES Act is to provide fast relief to those left reeling from COVID-19. In meeting those goals, it also introduced a number of changes to current tax law that will benefit many business owners this year and in the future.
An important note: While the changes that accompany the CARES Act can benefit all types of business owners from solo-preneurs to independent contractors, they may not be applicable if your business has received funds through the Paycheck Protection Program. Always check your eligibility before attempting to claim a new tax credit. Read on for some tax moves you can make right now to maximize your benefits in 2020 and beyond.
Tax Move #1: Line Up Your Tax Team Now
An economic downturn is not the time to start DIYing your taxes. Spending more money amid a lagging economy may feel counterintuitive, but spending it on the right person – in this case, a qualified CPA – might be what sustains you through the worst of times. So how do you find the best person for the job? Here are some tips to keep in mind when looking for the accountant who’s the right fit for you:
· Ideally, find someone who’s been around the block a few times. Many CPAs have seen clients through a variety of economic storms. They will be up to date on the latest tax law changes, know what deductions and credits will help your business the most, and add a layer of protection between your company and the IRS.
· Understand whether you need to hire an internal accountant or an external consultant. Smaller businesses may only need the expertise of a qualified CPA at tax time, but larger, more complex companies could benefit from having an inside source on the staff.
· Do your homework. If you aren't sure where to begin your search, you can check with the American Institute of Certified Public Accountants (AICPA). The organization's directory allows you to check a potential CPA's credentials and search for candidates with specialized certifications.
Tax Move #2: Always Do the Extra Credit Work
During disasters, crises, and times of economic hardship, the U.S. government and the Small Business Administration often step in to protect business owners and minimize interruptions to regular commerce. It can be difficult to stay on top of frequently evolving tax law, but the payoff can be huge. Sit down with your CPA and discuss which special tax credits will benefit your business. This year, Congress has passed numerous tax credits that could help entrepreneurs get back to business as usual. If you’re already planning for your 2020 filing, consider these potential credits:
· Family and Sick Leave Credit: If your business has fewer than 500 employees, you’re eligible for this benefit, which helps to offset the costs employers incur in granting sick leave to employees impacted by the virus.
· The Employee Retention Tax Credit: The ERTC rewards businesses for keeping people in the workforce during the economic downturn and enables employers to receive a 50 percent tax credit on wages up to $10,000 per employee.
· Employer Payroll Tax Deferral: The government is extending the deferment period for payroll taxes, now allowing 50 percent to be paid by the end of 2021 and the remainder by the end of 2022.
Tax Move #3: Don’t Cut Your Losses; Use Them
If your business is suffering a loss right now, you’re not alone. However, changes to current tax legislation may mean you can leverage more of those losses to maximize your benefit. While current tax law already allows businesses to claim Net Operating Losses (NOLs) to offset taxable income in future years, the CARES Act has relaxed some of those restrictions. Here’s what you need to know when claiming your NOLs:
· Business owners with losses from 2018 to present can now claim 100 percent of losses. Previously, only 80 percent of losses could be used to offset taxable income and only in future tax years.
· Rather than leverage losses in future years, business owners can now carry them back as far as five years.
· This change is important for business owners struggling to maintain cash flow and liquidity.
· If you choose to carry NOLs forward, you can do so with losses from 2018–2020 for up to 20 years, but these will be subject to the 80 percent limit.
Tax Move #4: Deduct Your Debt
If you aren’t already claiming your business interest payments as a tax deduction, you’re missing a big opportunity. And now, if you’re planning for next tax season, there’s an even greater impetus to track and report your interest payments. Previously, business owners could deduct business interest up to 30 percent of adjusted taxable income. Here’s what you need to know about maximizing your deduction:
· Recent changes contained in the CARES Act allows business owners to deduct 50 percent of debt interest, rather than 30 percent.
· Qualifying debts include business loans, business credit cards and lines of credit, vehicle purchases, mortgages, etc.
· The business owner must be the legal loan holder and may need to show proof of repayment.
· You must have evidence that your funds are used as intended to deduct interest payments.
· Any prepaid interest is not deductible at one time; it must be scaled for the life of the loan.
A word of warning: The changes and benefits resulting from the CARES Act may seem like a lifesaver, and for some businesses, they may be. However, it's wise to exercise caution and use only the benefits that will positively impact your business without negative future repercussions. For example, the CARES Act makes it easier to borrow against retirement savings, but it is not advised to start pillaging your 401(k)s and IRAs unless it's a last-resort scenario.
The tax landscape is always shifting, and in light of the current economic climate, it’s evolving at a dizzying speed. It’s more important than ever that small business owners have the support and expertise they need to take advantage of tax benefits that may sustain them through economic hardship and an unstable market. Using the tax moves outlined above can give you a starting point for getting your taxes in order this year and in the years ahead.