Small-Business Owners: Don’t Forget Special Pandemic Tax Breaks

Whatever shape your business is in, here are tax moves to consider now

If you’re a small-business owner, don’t overlook tax breaks that could help this year—whether your business is on the ropes or is booming.

The coronavirus pandemic has left millions of small businesses like restaurants and shops struggling to survive. Nearly two million American firms, mostly small ones, have already closed their doors in 2020, says Raymond Greenhill, president of Oxxford Information Technology, which tracks about 32 million U.S. businesses of all sizes. At the same time, some small firms, like cleaning services and bike stores, are straining to meet demand.

Either way, harried owners who have focused mainly on the Paycheck Protection Program and payroll tax deferrals allowed this year may be unaware of other provisions that could aid them. Several were prompted by the pandemic, while others are longstanding but newly relevant.

“Tax strategies aren’t top of mind during a crisis, but they make a difference. Some of them provide cash that many owners need,” says Bill Smith, an attorney who leads CBIZ MHM’s national tax office. One allows owners to sell stock in smaller companies tax free.

Whatever shape your small business is in, here are tax moves to consider now. Note: All are likely to require professional help but could provide big benefits.

Claim 2020 losses on 2019 tax returns. Section 165(i) of the tax code lets individuals and businesses claim some losses on last year’s tax return if a federal disaster has been declared. The intent is to get cash to victims as soon as possible.

Disaster declarations are usually for events like hurricanes or earthquakes, but this year the pandemic qualifies. For example, a restaurant owner who had a good year in 2019 might be able deduct 2020 pandemic expenses for food spoilage on the 2019 tax return and reduce taxes owed or get a refund. Alternately, these losses can be claimed on 2020 returns, which are due as late as Oct. 15, 2021.

Not all pandemic costs are deductible, and it’s not clear which ones qualify because the pandemic differs from other disasters. Write-offs may need to be for “casualty” losses as defined by the tax code, which typically requires them to be both sudden and caused by the disaster.

Valrie Chambers, a CPA who studies casualty losses and teaches at Stetson University, thinks that a revenue drop for a restaurant due to capacity limits wouldn’t count. She thinks that added costs for deep-cleaning or a payment to get out a lease because of the pandemic could count.

The Internal Revenue Service hasn’t issued guidance on pandemic disaster losses, but a spokesman says the agency is aware of the issues.

Next year, carry 2020 losses back up to 5 years. The 2017 tax overhaul ended the ability of many firms to use current operating losses to offset prior-years’ taxes, but this spring’s Cares Act allows a five-year carryback of net losses for 2018, 2019 and 2020. It also removed other restrictions on their use, making this provision highly valuable to some taxpayers.

A broad array of losses are allowed under this provision, because it applies when business deductions outstrip income. However, this benefit takes longer to get than the one for disasters because 2020 losses can’t be claimed until returns are filed next spring.

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 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.

Mr. Smith says that this year some smaller firms have seen revenues drop enough to lower their average below the current $26 million threshold for several years going forward, enabling them to switch to cash accounting.

Get generous treatment for losses from failed businesses. Tax code section 1244 provides a benefit for some failed businesses that’s often overlooked, says Dr. Chambers. Certain owners who sell can use up to $50,000 of net losses—$100,000 for a married couple filing jointly—to offset current or future ordinary income such as wages.

Without this provision, the losses would count as capital losses that only offset capital gains, plus $3,000 of ordinary income a year. Such losses could take a long time to use.

The requirements to claim this break apply to many investors in small firms. The business must be organized as a C or S Corp oration, not a partnership, and the break often doesn’t apply if more than $1 million in capital was invested at the firm’s outset. It can only be used by original investors, not subsequent ones.

Sell a business, tax-free. Owners who sell at a profit have a terrific opportunity if they can use code section 1202. In that case, some or even all of the gains on the sale may be tax-free.

To be eligible, the business must be a C corporation, and the seller must have held the stock in it for more than five years. The business can’t have had more than $50 million in assets when it was started. If the conditions are met, says Mr. Smith, the owners can often eliminate capital-gains tax on at least $10 million of profits on their sale, and sometimes far more.

Bonuses Aside, Tax Law’s Trickle-Down Impact Not Yet Clear

The New York Times · by JIM TANKERSLEY · January 22, 2018

Employees at an Apple retail store in San Francisco in 2016. Apple is among the companies handing out bonuses to workers in the wake of the $1.5 trillion tax cut. Noah Berger/Reuters

WASHINGTON — There are good ways to start measuring how much the Trump tax cuts might be helping American workers. Tracking the bonus announcements flowing from corporations is not one of them.

Those announcements, which include $2,500 in stock grants for Apple employees, up to $1,000 for certain workers at Walmart and $1,000 bonuses for Bank of America employees, are both real money and smart marketing. President Trump and top Republican lawmakers have praised many of the companies that are disclosing tax-cut-fueled bonuses and wage hikes.

For the most part, though, they are not indicative of the windfalls that companies are reaping from the $1.5 trillion tax law — and how much of that money that might trickle through to workers in the years to come.

Companies are acknowledging this in their fourth-quarter earnings reports and other financial disclosures, which earmark just a sliver of their future tax savings for direct and indirect investments in workers.

Bank of America’s bonuses will cost the bank $145 million in 2018, or about 5 percent of the nearly $2.7 billion in savings it is expected to reap in 2018 from a lower, 21 percent corporate tax rate. Apple’s bonuses will cost $300 million, a fraction of the $40 billion, at least, that the tech giant is saving from a single provision in the law, which allows it to return earnings held overseas at less than half the rate it would have paid under the old system.

And two days before Walmart snagged glowing headlines for handing out $400 million in bonuses and lifting its minimum wage at a cost of $300 million, the nation’s largest retailer by sales unveiled a plan to buy back company-issued debt. The cost of the buyback: $4 billion.

The gap between what companies are saving and how they are, so far, rewarding workers, doesn’t mean that the new law won’t eventually lead to substantial wage increases. Economists across the political spectrum agree it’s simply too soon to tell whether — and to what degree — that will happen.

The flurry of high-profile bonus announcements “are hard to interpret,” said Mihir Desai, an economist at Harvard Business School and Harvard Law School whose research supports the idea that corporate tax cuts lead to at least modest wage increases. “They may well be evidence for these gains, but just as well may be an example of savvy public relations. The reality is we’ll have to wait for a few years and good empirical work to really know the answer.”

Before Mr. Trump signed the tax bill in December, few companies had committed to rewarding workers if it passed. Since then, more than 200 have pledged bonuses, wage increases or other benefits for employees that are specifically tied to the new law, which includes deep cuts to business tax rates. The new law lowers the corporate rate to 21 percent, from a previous high of 35 percent, and it includes a 20 percent deduction for many owners of so-called pass-through companies, who pay taxes on their profits at individual income tax rates.

Republicans have celebrated the bonus announcements as part of a concerted party strategy to build public support for the new law. “Tax reform is working,” House Speaker Paul D. Ryan, Republican of Wisconsin, said on Thursday, before citing the Apple bonus announcement. “Workers are coming home and telling their families they got a bonus, or they got a raise, or they got better benefits.”

The bonus announcements are, in some ways, a relatively easy opportunity to generate positive headlines and, perhaps, curry favor with Mr. Trump.

“Certainly, a lot of what you’re seeing is bonuses, rather than wages. It’s a one-time thing — you don’t have to do it again. It’s political, obviously. It’s P.R.,” said Jim O’Sullivan, the chief United States economist at High Frequency Economics.

House Speaker Paul D. Ryan, Republican of Wisconsin, at the Capitol last week.Tom Brenner/The New York Times

There is some evidence that messaging is working: Since the bonus announcements began, polls have shown rising support for the law, though it is still the case that more voters oppose the tax bill than favor it.

Liberals, though, have latched on to other details in recent corporate announcements — the ones that show companies plan to pass most of their initial tax savings to shareholders by raising dividends or buying back stock or debt.

An S&P Global report estimates that banks will return 75 percent of their windfall to shareholders. More than four in five Morgan Stanley analysts, across industries, said in a survey that the firms they track will use their tax gains to facilitate buybacks and dividends. Barely one in five said firms would pass even some of the tax gains on to workers.

Andrew Bates, deputy communications director for the liberal opposition research group American Bridge, said the Walmart buybacks, which dwarf the cost of what it is returning to workers, show “why Donald Trump is forced to hide most of the story when he tries selling this plan to the American people. It’s also why they aren’t buying it.”

Senator Elizabeth Warren of Massachusetts, a leading Democratic critic of Wall Street, said last week that tax-cut-linked share buybacks by companies such as Bank of America are “not a measure of the economic health of the American family.”

Republicans predicted the majority of the corporate tax cut would eventually trickle down to workers through investment, jobs and wage increases. At one point early in the tax debate, the chairman of the White House Council of Economic Advisers, Kevin Hassett, said that workers would enjoy the majority of the benefits from a corporate tax cut.

The theory is investment in structures, equipment and other initiatives, either by companies or their shareholders, boosts productivity in companies, and with it, wages. It is a bank-shot theory of wage growth, and one that many economists espouse, though often to a much lesser degree than Mr. Hassett, whose research suggested typical workers would see an increase of between $3,000 and $7,000 in take-home pay.

“The theory that tax cuts will increase wages is a theory based on investment, and the effect that increased investment will have on productivity,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “It is not a theory based on a pure transfer of excess profits into workers’ profits. That takes longer than two weeks to happen.”

Anecdotes of bonus payments, or even minimum wage increases, are the least-useful way to determine if a tax change is lifting workers, said Scott Greenberg, a senior analyst at the Tax Foundation in Washington. The best way is rigorous academic study, which Mr. Greenberg noted takes years to complete.

The middle ground between those two is watching economic indicators — the rate of investment growth in the economy, or of real wage growth.

But even that will prove tricky in the months to come, because the economy was strengthening even before the tax cut. Most economists believe the United States is now at or near so-called full employment, when employers are forced to compete for scarce workers, and employees are empowered to bargain for higher wages, whether their companies just received a tax break or not.

Mr. O’Sullivan said it will be difficult to initially tease out the impact of the tax bill from those overall trends. “It’s going to buried in with everything else,” he said.

Politicians will make no such distinctions, of course. But workers might be able to guess if wage gains are in their future, at least a little bit, by reading the fine print of corporate announcements. If companies announce new projects, initiatives or capital investments — anything that might boost worker productivity — wage increases could follow.

Not because companies are dying to share their tax spoils with workers. But because they have to, or those workers will take a job with another company that will.

In a Complex Tax Bill, Let the Hunt for Loopholes Begin

The New York Times · by NATALIE KITROEFF · December 27, 2017

An assembly line at Houdini Inc. in Fullerton, Calif. The company used a 2004 law to claim a tax refund of nearly $300,000. When the I.R.S. sued, Houdini prevailed. Colin Young-Wolff for The New York Times

It was supposed to be a tax cut for manufacturers. Then it got out of control.

World Wrestling Entertainment took it for producing wrestling videos. Regional gas stations claimed it because they mix ethanol with base fuel. Grocery stores asked for it because they spray their fruit so that it ripens. Pharmacies could take it because they have booths that print photos.

Republicans in Congress passed that deduction more than a decade ago, and they repealed it in the tax bill signed on Friday by President Trump. It is a lesson in the abundant creativity of American business in interpreting the tax code.

The latest overhaul could play out the same way. Already, lawyers and accountants are eyeing several provisions that investors and companies could potentially exploit.

The bill, for example, lowers the taxes on so-called pass-through income, which is earned by partnerships and other types of businesses. Congress sold the provision as a way to help smaller companies. But lawmakers added language that allowed big real estate developers to benefit. The result could be a tax break for any company that buys and operates a building for its business.

The new law is also supposed to encourage companies to make investments in the United States. But the rules were written in such a way that they could give businesses an incentive to keep their money in foreign countries and build factories abroad.


The wildly popular manufacturing break, passed in 2004, is a case study in the unforeseen consequences of changing the tax code — how companies take advantage of gaping holes and force the government to play catch-up.

A Starbucks roasting facility in Seattle. A so-called Starbucks footnote to the 2004 law granted coffee shops a deduction if the coffee they sold was made with beans they roasted off site. Matthew Ryan Williams for The New York Times

The provision, known as the domestic production activities deduction, gave companies a tax break on income they earned from making things in the United States. It was intended to help American manufacturers, which were struggling to hold their own against competition from overseas.

Then a raft of other industries heard about the rule as it was being devised and fired up their lobbying machines. Suddenly, everyone became a manufacturer.

Movie studios got the break because they produced films, and tech giants won it, too, for making computer software. Construction companies got it for making buildings, and so did engineers and architects for designing them.

Starbucks hired lobbyists to make the case that it, too, was a producer, because the company roasts coffee beans. Congress added language that allowed coffee shops to deduct a percentage of every cup sold if it was made with beans they roasted off site. It became known as the Starbucks footnote.

“This has been a boondoggle tax expenditure,” said Robert J. Shapiro, a former Commerce Department official who founded the economic advisory firm Sonecon. “It is a political lesson. You are always liable to create tax loopholes that grow.”

The government initially estimated that the 2004 law would cost a net $27.3 billion from 2005 through 2014. It ended up costing over $90 billion during that period, according to a congressional report.

The Internal Revenue Service had to warn retailers that cutting keys doesn’t make you a manufacturer. Neither does mixing paint, putting plants in the sun to grow or writing “Happy birthday” on a cake you didn’t bake.


But in more than a decade of battling with companies about the rule, the government gave up more ground than it won. One of its most epic losses came at the hands of a David-size challenger in Fullerton, Calif.

It all started in tax class. Dan Maguire, an accountant by trade, was sitting in a seminar about the new features of the tax code in 2005 when he first heard about the manufacturing deduction. He became obsessed.

“I’m thinking, ‘Gosh, as crazy as it is, this is a good deduction for Houdini,’” he said. Houdini Inc., better known as Wine Country Gift Baskets, is a plucky maker of assortments for special occasions that employs Mr. Maguire as its chief financial officer.

Mr. Maguire filed for the deduction in amended returns for 2005 and 2006. The I.R.S. gave Houdini a refund of close to $300,000. Then, when it realized what had happened, it doubled back and audited the company, demanding that Houdini return the money.

“It’s the government — what do you expect?” Mr. Maguire said. “They aren’t exactly an efficiently run organization.”

When Houdini refused to give the refund back, the government sued the company in 2011.

At issue was a straightforward question: Does putting wine and chocolate into a basket amount to manufacturing? Federal lawyers sputtered at the thought.

“I can make a gift basket at home,” pleaded one government lawyer, according to a transcript in the case. “I can go to the store, and I can purchase these items and put them into a basket which I have purchased and put cellophane wrap around it, but in the process, I have not altered anything in it.”

Jair Morales preparing a holiday basket for shrink-wrapping at Houdini. To win its case, the company argued that its warehouses had all the elements of a traditional manufacturing system. Colin Young-Wolff for The New York Times

The problem, for the government, was that its lawyers didn’t have much to stand on. The deduction’s regulations explicitly defined manufacturing as “combining or assembling two or more articles.”

Just putting two things together wouldn’t count, but Houdini argued that it had all the elements of a traditional manufacturing system going in its warehouses. There are assembly lines, conveyor belts, forklifts, “just like Henry Ford,” Mr. Maguire said.

In the end, a federal judge ruled against the government. Mr. Maguire has been claiming the deduction ever since. It has saved the company over $5 million. “This was a fun lesson to teach the I.R.S.,” he said, with conviction.

The government took it on the chin once more over the deduction when a medicine packaging company sued the I.R.S. in 2012. The company, Precision Dose, said it deserved the deduction, which had been denied. It did not make the liquid medicine or the cups that the medicine went into. But it did design the cups and the lids on them. The government said the company was just repackaging drugs.

Judge Philip G. Reinhard, in federal court in Illinois, took the company’s side.

That will all be moot with the latest tax bill. Congressional Republicans said the deduction was no longer necessary with the overall reduction of the corporate tax rate. So the hunt for unintended gold mines will go down new paths.

“If the bar has been set low by the regulation, you can understand why taxpayers are claiming it,” said Connie Cheng, a tax managing director at the accounting firm BDO USA. It took longer to write the law that included the manufacturing deduction in 2004 than it did to shape the entire tax bill this time around. The haste is sure to create countless new adventures for accountants like Ms. Cheng.

“That’s the nature of tax in general,” she said. “Every time you write a rule, there are people out there who think about ‘How do we get creative with it, and how do we get around it?’”

The Winners and Losers in the Tax Bill

President Trump has called the $1.5 trillion tax cut that Republican lawmakers are on the verge of passing a Christmas present for the entire nation.

But the fine print reveals that some will get a much nicer gift than others, the benefits will change over time, and some will be left out in the cold. Real estate developers and technology companies could see big tax cuts, while low-income households and people buying health insurance could lose out.

With the bill finally headed to a vote this coming week, taxpayers are scrambling to determine whether the legislation renders them winners or losers.


PRESIDENT TRUMP AND HIS FAMILY Numerous industries will benefit from the Republican tax overhaul, but perhaps none as dramatically as the industry where Mr. Trump earned his riches: commercial real estate. Mr. Trump, along with his son-in-law Jared Kushner, who is part owner of his own real estate firm, will benefit from lower taxes on so-called “pass through” income, which is money earned by partnerships and other types of businesses whose income is passed through to its owner and taxed at the individual tax rate. Mr. Trump and Mr. Kushner benefit since they own properties through limited liability companies and other similar vehicles.

Under current law, that income is taxed at rates as high as 39.6 percent. Under the bill, much of that income could be taxed at a rate as low as 29.6 percent, subject to some limitations. Real estate also avoided new limits on interest deductions and retained its ability to defer taxes on the exchange of similar kinds of properties. The benefits of lower rates on pass-through income will extend to Mr. Trump and Mr. Kushner’s partners at real estate investment trusts as well. At the last minute, lawmakers added language to make it easier for real estate owners to avoid some of the pass-through provision’s restrictions and maximize the tax benefits even more.

BIG CORPORATIONS Industries like big retailers will benefit from the new corporate rate of 21 percent, since those companies pay relatively close to the full 35 percent rate. Other aspects of the corporate tax cuts will be enjoyed by an array of multinational industries, particularly technology and pharmaceutical companies, like Google, Facebook, Apple, Johnson & Johnson and Pfizer. Such multinational companies have accumulated nearly $3 trillion offshore, mostly in tax haven subsidiaries, untouched by the United States taxman. The tax bill will force those companies to gradually bring that money home, but it will be taxed at rates ranging from 8 percent to 15.5 percent. That’s far lower than the current 35 percent tax rate on corporate profits and even lower than the new 21 percent rate.

Plus, American companies will no longer owe full corporate taxes on future profits they say they earn abroad, providing more incentive to push income into tax haven subsidiaries. The law even includes provisions that could encourage companies to move workers abroad, despite pledges to do the opposite.

MULTIMILLIONAIRES An exemption for estates that owe what Republicans call the “death tax” was lifted to $22 million from $11 million. That doesn’t matter much to billionaires like Charles Koch, but means a big tax cut for people with estates worth tens of millions of dollars.

Plus, the top rate applying to wages and interest income would be cut to 37 percent from 39.6 percent.

PRIVATE EQUITY MANAGERS During the campaign, Donald Trump railed against wealthy investment managers who, thanks to the so-called carried interest loophole, pay taxes on the majority of their pay at a lower capital gains rates. But the purported reform to this tax provision will affect few if any private equity managers, leaving the loophole intact.

PRIVATE SCHOOLS AND THE PEOPLE WHO CAN AFFORD THEM Parents would be eligible to use a type of tax-preferred savings plan — known as a 529 plan — to save for their children’s elementary and secondary education. Right now, those savings plans are only eligible for college. But they would be expanded to allow for up to $10,000 a year for tuition at private and religious schools.

THE LIQUOR BUSINESS Excise taxes for small brewers and distillers are reduced in the final agreement. Those industries are dominated by entrepreneurial small businesses often based in rural areas. They also have strong lobbyists, and many are based in states with powerful senators, like Senator Rob Portman of Ohio. Mr. Portman, who tucked a provision to help craft brewers into the Senate legislation, was part of the small team of lawmakers who merged the two bills into a final version.

ARCHITECTS AND ENGINEERS They were originally restricted in how much they could benefit from the new pass-through provision. If they structure their businesses a certain way, the final version will let them benefit fully.

TAX ACCOUNTANTS AND LAWYERS Mr. Trump once said his “dream” was to put tax preparation services out of business by simplifying the tax code. But the rushed legislation will probably have the opposite effect, as individuals try and make sense of the complicated new provisions, staggered dates and new rates. The uncertainty and confusion will probably create numerous new opportunities to game the system: tax preparers are sure to see a boom in business advising clients on how to restructure their employment and compensation arrangements to take advantage of the lower tax rates on income reported by corporations and pass-through entities.



PEOPLE BUYING HEALTH INSURANCE With the repeal of the individual mandate, some people who currently buy health insurance because they are required by law to do so are expected to go without coverage. According to the Congressional Budget Office, healthier people are more likely to drop their insurance, leaving insurers stuck with more people who are older and ailing. This is expected to make average insurance premiums on the individual market go up by about 10 percent. All told, 13 million fewer Americans are projected to have health coverage, according to the Congressional Budget Office.

INDIVIDUAL TAXPAYERS IN THE FUTURE To stay under the $1.5 trillion limit for new deficits lawmakers set for themselves, they opted to make the cuts for individuals and families temporary, expiring at the end of 2025 — even as the corporate tax cuts will be permanent. Republicans are counting on a future Congress to extend the lower rates, as has happened in the past. But there are no guarantees, and that could mean a big tax increase down the road. What is more, the use of a different, less generous measure of inflation would push taxpayers into higher tax brackets more quickly.

THE ELDERLY A 2010 law requires that any legislation that adds to the federal deficit be paid for by spending cuts, increases in revenue or other offsets. Some cuts would be automatic, and the biggest program to be affected is Medicare, the health insurance program for the elderly and disabled. Dozens of other programs are likely to be cut as well, but Medicare, which would face a 4 percent cut, is by far the biggest. Republicans say that this rule will be waived and the cuts will be averted, but that will take a bipartisan deal.

LOW-INCOME FAMILIES Low-income families who claim the earned-income tax credit will lose out on at least $19 billion over the coming decade under the bill because of the change in the way inflation is calculated. And a new requirement that families claiming the child tax credit provide a Social Security number is projected to mean a big reduction in the families claiming it, since those who are not in the United States legally would be prohibited, even if their children were born in the United States.

OWNERS OF HIGH-END HOMES Under current law, the interest on mortgages for first and second homes is deductible for the first $1 million of the loan. The overhaul would cut that to the first $750,000 and eliminate the owner’s ability in the current law to deduct the interest on a home-equity loan up to $100,000. This could drive down home prices in some high-end markets; good for prospective buyers but bad for prospective sellers.

PEOPLE IN HIGH PROPERTY TAX, HIGH INCOME STATES Homeowners in high-tax states like New York, New Jersey and California could be big losers, particularly if they have high property taxes. Their ability to deduct their local property taxes and state and local income taxes from their federal tax bills is now capped at $10,000. In some cases, that could be offset by the lower tax rates that all taxpayers will owe on their ordinary income.


THE INTERNAL REVENUE SERVICE The tax collection agency has been underfunded and understaffed for years. Now, it will have a raft of new tax rules to deal with that will require upgrading its software, printing new manuals and explaining to confused taxpayers how things work. All this is expected to take place while the commission is working under the supervision of an interim commissioner, who is expected to be replaced sometime next year.

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