Small businesses face tax headaches on top of pandemic woes

Small businesses that have been hit by the pandemic, inflation, and shipping issues have another challenge to add to their plate: taxes.

Tax season can be complicated for everyone, but as the April 18 filing deadline approaches, small business owners, contractors, entrepreneurs and others are faced with an ever-changing set of rules and regulations.

Additionally, many are dealing with delayed returns and refunds from prior tax periods. The Internal Revenue Service has warned of a delay and says more delays are expected.

"It's worse this year than it was last year," said Gene Marks, owner of The Marks Group, a small business consulting firm in Bala Cynwyd, Pennsylvania. "It seems to get worse every year, and this year is definitely worse than previous years."

The IRS said earlier this month that it was hiring 10,000 workers to deal with a backlog of 23 million items caused by limited operations during the coronavirus pandemic. But understaffed at both the federal and state levels, CPAs have found it difficult to reach someone if problems or questions arise.

"I've never seen this in my career, everyone's understaffed and behind schedule," said Scott Orn, chief operating officer of accounting and human resources startup Kruze Consulting.

But he urged companies to be patient with the IRS and tax officials at the state level. Government programs provided during the pandemic, including the Paycheck Protection Program and Economic Injury Disaster Loans, have helped countless small businesses.

“A lot of businesses were saved, but that added administrative burden was really hard on the IRS and state tax agencies,” Orn said. "The unintended consequences of good deeds have been difficult to deal with."

Orn and other tax experts recommend filing for a tax extension this year, like most years.

“We file an extension for every customer, even though they have to pay estimated taxes throughout the year,” Orn said. “It gives us more time to do the tax return correctly. You just get a lot more wiggle room and there's not as much time pressure."

There are other things to consider as well. It's not too late to claim the employee retention credit. The program, established in 2020 to help businesses during COVID, was subject to eligibility rule changes multiple times during the pandemic, so not all businesses realized they qualified. In its final form, the program offered a maximum credit of $7,000 per employee, designed to encourage employers to keep workers on their payroll. The credit ended Oct. 1, 2021, but businesses can still apply retroactively by filing an amended payroll tax return.

Additionally, many companies that struggled during 2020 actually had a better year in 2021 as the economy recovered. That could affect the estimated tax payments businesses pay throughout the year.

Therefore, businesses need to watch their cash flow and make sure they have enough money on hand to make further tax payments, if necessary, to avoid penalties.

“This year, there will be a surprise return, and companies will end up with bigger tax bills than they thought,” Orn said. “That's really a good thing. What small business owners should be concerned about is making sure they have the cash flow support for estimated tax payments; It might surprise you."

Finally, small businesses should note that any money received through the Paycheck Protection Program or other COVID-related programs does not count toward gross income at the federal level. Unlike other types of loans, PPP loans are tax-free, whether or not they have been forgiven. Businesses may have to report certain information about the loan if it was forgiven and if they are deducting related expenses.

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