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Covid tax breaks are gone. What it means for business tax returns

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Samuel Corum/Bloomberg through Getty Images

In the last 2 years, rules governing small business taxes has changed dramatically. The end of many pandemic-era deductions or deferrals is here this year. 

The good news? These tax benefits won’t have a significant impact on small-business owners, even though they are over. Tax planners and accountants believe that the Build back Better infrastructure bill will have a bigger impact. This includes plans to increase capital gains taxes and reduce the 20% deduction for qualified company income. There are also other factors that could increase taxes. But, these haven’t come to fruition. Yet. 

The tax bill has been about the barking dog in many different ways. They did not do any capital gains and they didn’t pay state taxes. It’s good to hear about the things that did not happen,” Dean Zerbe from Alliantgroup, which is a tax advisory firm, said. 

However, businesses can apply retroactively to certain pandemic benefits. This tax season brings about some major changes for small-business owners. 

Don’t wait to apply for the Employee Retention credit 

Created in 2020 as part of the CARES Act under then-president Donald Trump, the Employee Retention Credit ended in September — a quarter earlier than expected. Employers can get a full refundable tax credit of up to $70,000 each quarter through the ERC. This is to encourage employees to stay on their payroll. 

Three major updates to the program were made in the past two years. This is why so many small business owners didn’t know about it or did not apply.  

The PPP loan holder was initially not eligible for the program. This changed with the introduction of the second iteration. Rules that restricted how much money a company could receive based on the extent of its pandemic exposure were also relaxed. 

Small businesses can still retroactively apply if they have missed the opportunity. Kevin Kuhlman (Vice President of Federal Government Relations at the National Federation of Independent Business), said that many business owners don’t know much about the program. However, they can still submit an application. The tax year ahead will be marked by retroactive filings. 

Business owners have expressed frustration with the reductions to the tax credit program. They kind of felt — especially if they were relying on the tax credit — that they had received a little short shrift,” said Kuhlman. 

Operating losses are less eligible for tax treatment 

In the recent years, there has been a significant shift in how business owners can either carry forward or back their net operating loss. NOLs used to be able carried forward and carried back for up to 20 years. After the Tax Cuts and Jobs Act of 2017, rules were changed. The NOL deductions could now only be limited to 80% of your taxable income, and no carrybacks allowed. 

When the pandemic hit, the CARES Act waived TCJA rules and allowed business owners to carry back net operating losses  generated after Dec 31, 2017 and before Jan 1, 2021 up to five years. The cap on business interest expenses has been increased to 50% from 30%. In 2020 taxes, net operating loss was prominent. Business owners amended tax returns that contained previous net operating losses. 

Since the outbreak, rules regarding net operating loss and business interest expense have been changed to reflect the current situation. Limits on net operating losses could mean additional income tax payments. A business could, for example, have a net operating income of zero in 2018, and then have taxable income in 2019. They can use that net operating income to lower their 2019 tax liability. The CARES Act allows for this to be reversed if the business owner had taxable income in 2017. It’s coming to an end.  

The tax credit for Covid-19 paid leave is now expired 

Many people have had to take time off in the last two years due to caretaking responsibilities — caring for a quarantined family member or children who have to be supervised all day because school is closed due to Covid-19. Families First Coronavirus Response Act was passed March 2020. It required some employers to offer paid sick or medical leave to respond to the pandemic. It expired in 2020. Employers who continue to offer these benefits can use payroll tax credit to pay for the benefits. The tax credit for Covid-19 paid leave has expired in September. This makes it more difficult for small employers to provide additional paid leave. 

Due dates for deferred Social Security benefits 

Employers can defer Social Security employer contributions under the CARES Act. These payments have now become due. One-half of the payments were due at 2021’s end, while the other half are due at this year’s end. Due to the deferred payments, IRS warns taxpayers that they will face penalties if they miss the Dec. 31 deadlines. 

According to tax planners, this is less likely than the change that caused business owners problems because few people took advantage. Edward Renn is a partner with Withers’ private client and tax group. He said that he doesn’t see too many issues because many of his clients have saved the money in bank accounts so it would always be available when they need it. 

Small business owners might need to rely more on tax planning or accountants because of all the tax changes over the past two years. The stress of filing tax returns can be compounded by the inability of the IRS to respond quickly, due to its record-breaking backlog. 

“It feels as if it’s gone off the track. Meredith Tucker of Kaufman Rossin (an accounting and advisory firm) said that 6 million returns still have to be filed. She also stated that only one in 10 calls is being answered. Still being processed are tax returns from the previous year. The tax returns from last year are still being processed. Taxpayers who have overpaid may wish to transfer that amount to the next period. However, the older tax filings have not been processed. 

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