The Covid tax breaks are gone. What this means for business tax returns

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The rules regarding small business taxes have changed significantly over the past two years. This year is no exception, as many of the various pandemic-era deductions and deferrals come to an end.

The good news is that even if these benefits end, the impact on the overall tax rate for most small business owners will not be significant. Accountants and tax planners say the biggest impact would have come from the Build Back Better infrastructure bill, which includes proposals to increase capital gains tax, limit the deduction to 20% for qualifying business income under Section 199A and other factors that would increase taxes, but these did not occur. Again.

“In a lot of ways the tax bill is about the dog that didn’t bark. They didn’t do anything about capital gains, they didn’t do anything about state tax. There’s a lot of good news about things that haven’t barked. It’s not going to happen,” said Dean Zerbe, national managing director of Alliantgroup, a tax consultancy.

Meanwhile, business owners can still apply for certain pandemic-related benefits retroactively. Here are some of the most important changes small business owners need to know about this tax season.

It’s not too late to claim 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. The ERC is a fully refundable payroll tax credit for employers that can add up to $70,000 per quarter and was created to encourage businesses to keep their employees on their payroll.

The program has undergone three major changes in the past two years, which is a big reason why many business owners were unaware of the program or did not apply for it.

Originally, the program was not open to those who had taken out a PPP loan. That changed when the second iteration arrived. Rules that limited the amount a company could get based on the extent of the pandemic’s impact were also relaxed.

For small businesses that missed the program, it’s not too late to file retroactively. Many business owners are unaware of the program, said Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business, but can still apply. Retroactive returns are expected to account for a large portion of this year’s taxes.

“We saw a lot of frustration from business owners about the changes to this program, especially the shortening of it. They kind of felt – especially if they were relying on the tax credit — that they had been kind of overlooked,” Kuhlman said.

The tax treatment of operating losses is less generous

The way business owners can carry forward or defer net operating loss has changed significantly over the past few years. Previously, NOLs could be carried back two years and carried forward 20 years. Then the Tax Cuts and Jobs Act of 2017 changed the rules by limiting NOL deductions to 80% of taxable income and not allowing carryovers.

When the pandemic hit, the CARES Act overturned the TCJA rules and allowed business owners to defer net operating losses generated after December 31, 2017 and before January 1, 2021 for up to five years. In addition, the ceiling on business interest expenses has been raised to 50% of business income, from 30% previously. Net operating losses were significant in the 2020 taxes, and business owners also amended previous tax returns with net operating losses they carried forward.

Now, the rules governing the use of business interest expense and net operating loss have returned to what they were before the pandemic. Limits on net operating losses could mean additional income tax payments. For example, if a business owner had a net operating loss in 2018 and then had taxable income in 2019, they could use the net operating loss to reduce the 2019 taxable income. Under the CARES Act , this could also be carried back if they had taxable income in 2017. This is now coming to an end.

The Covid-19 paid vacation tax credit has expired

Many people have had to take time off over the past two years due to their babysitting responsibilities – caring for a quarantined family member or children who need to be watched all day because the school is closed due to Covid-19. The Families First Coronavirus Response Act, passed in March 2020, required some employers to provide paid sick or medical leave for pandemic-related reasons. Although this expired at the end of 2020, employers who continued to offer such benefits could use payroll tax credits to cover the cost of the benefits. Now the Covid-19 paid vacation tax credit expired in September, making it difficult for small employers to grant additional paid vacation.

Deferred Social Security payments are due

Under the CARES Act, employers could defer filings for the employer portion of Social Security. Now those payments are due. Half was due at the end of 2021, and the other half is due at the end of this year. Since payments have already been deferred, the IRS has warned that there will be penalties for any taxpayers who do not meet the Dec. 31 deadline.

Tax planners say this change is less likely to cause pain for business owners because few have taken advantage of it. Edward Renn, a partner in Withers’ private client and tax team, said he doesn’t see too much of a problem, as many clients carefully put money aside in a bank account so that the money is ready in if needed.

With all the tax rule changes over the past two years, small business owners may need to rely on an accountant or tax planner more than ever. The unresponsiveness of an overburdened IRS, which is dealing with a record backlog of tax returns, adds to the stress that tax returns often bring.

“It just feels like it’s fallen off the rails. There’s 6 million statements that still need to be filed and maybe one in 10 phone calls gets answered,” said Meredith Tucker, director at Kaufman Rossin, accountant and consulting firm. Last year’s tax returns are still being processed. Taxpayers who have an overpayment may want to apply that overpayment to the next period, but previous tax returns have not yet been processed.

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