The coronavirus pandemic has caused tremendous challenges, particularly for small business owners across the United States. In response, numerous state and federal agencies have implemented emergency relief programs, such as the CARES Act and the Paycheck Protection Program, to help American workers and small business owners regain their financial footing. In addition to these options, there are many individual tax moves small business owners can make that may provide substantial relief. Taking advantage of these tax provisions can aid small business owners in overcoming the challenges created by the coronavirus crisis and help get small businesses closer to financial recovery. We would like to highlight a recent Wall Street Journal article by author Laura Saunders, titled “Small-Business Owners: Don’t Forget Special Pandemic Tax Breaks,” which provides important tax tips for small business owners affected by the coronavirus pandemic. We have included a breakdown of her top tips below:
Claim 2020 losses on 2019 tax returns.
This year’s pandemic qualifies as a federal disaster declaration. As such, according to section 165(i) of the tax code, businesses can claim some losses on last year’s tax return. For example, a restaurant owner who had a good year in 2019 might be able to deduct eligible pandemic losses incurred in 2020 on the 2019 tax return to reduce taxes owed.
Next year, carry 2020 losses back up to 5 years.
The Cares Act allows a five-year carryback of net losses for 2018, 2019 and 2020. A broad array of losses are allowed under this provision, because it applies when business deductions outstrip income. The expanded carryback benefit can be used both by corporations, including S corporations, and by owners of pass-through entities such as partnerships.
Switch to cash accounting to defer taxes.
The 2017 Tax Cuts and Jobs Act overhaul allowed firms averaging less than a certain amount of revenue over three years to use “cash accounting” rather than “accrual accounting.” This means they won’t owe the IRS until customers pay, rather than owing when the customers commit to pay.
Get generous treatment for losses from failed businesses.
Certain owners who sell can use up to $50,000 of net losses (or $100,000 for a married couple filing jointly) to offset current or future ordinary income such as wages. To qualify, the business must be organized as a C or S Corporation, not a partnership.
Sell a business, tax-free.
In order to do so, the business must be a C corporation, the business can’t have had more than $50 million in assets when it was started and the seller must have held the stock in the business for more than five years. If these conditions are met, the small business owners can often eliminate capital-gains tax on at least $10 million of profits on their sale (and sometimes even more!).
For further details, subscribers to the Wall Street Journal can read the full article here. As noted in the article, many of these provisions are likely to require professional help. We are here as a resource to help you navigate your small business thorough this public health and economic crisis. Please feel free to reach out to the Maddox Thomson team today. We would be happy to assist you.