Potential Tax Strategies That May Help Small Businesses This Year

Weathering the Storm

The COVID-19 pandemic has battered small businesses across the country. Already in 2020, almost 2 million businesses, mostly small ones, had to close permanently. On the other hand, some small companies such as cleaning and moving services have been overwhelmed with a rise in demand and are struggling to keep up.

For business owners in any situation, there are a few tax strategies to consider, which could help businesses save cash in order to deal with pandemic-related hardships. Some of these tax rules were passed because of the pandemic and some have been longstanding, but have new importance given the current situation. It’s important to consult a tax professional, but here are a few items that small business owners should keep on their radar.

Ways to Claim Losses

Businesses may be able to claim 2020 losses on 2019 tax returns. Section 165(i) of the tax code allows people and companies to claim some losses on the previous year’s taxes in the event of a disaster. Usually this rule is applied in cases of hurricanes or other natural disasters, but the pandemic falls under the guidelines this year.

Additionally, businesses can now carry 2020 losses back for up to five years. The 2017 tax overhaul made it so most companies were not allowed to use current losses to counteract taxes from past years, but the CARES Act changed this.

Cash Accounting and Capital Gains Taxes

For some small businesses with revenue below $26 million, it might be useful to switch from “accrual accounting” to “cash accounting.” This means that businesses can be responsible to the IRS only for money that customers actually pay, rather than money that they have committed to pay.

For people looking to sell their businesses right now, it’s worth looking at section 1202 of the tax code. If a sale meets certain conditions, owners may be able to avoid capital-gains tax on at least $10 million in profits on a sale.

Again, it’s important to consult with a tax professional and research these items further. It’s a difficult time for almost all business owners. While adopting a new tax strategy likely will not solve everything, having some extra cash on hand may give some businesses a much-needed cushion.

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