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If you’re a small business owner, it’s likely that the COVID-19 pandemic has left you little time to think about the upcoming tax filing deadline on July 15. Over the last few months, you’ve dealt with temporary lockdowns, lost revenue and layoffs—all while applying for desperately needed assistance.
Many small business owners understandably breathed a sigh of relief earlier this year when the government pushed Tax Day back due to COVID-19. Keith Hall, CEO of the National Association for the Self Employed, notes that “Given the COVID-19 public health emergency, the IRS allowed for the delay in both filing your 2019 tax returns and making tax payments without interest and penalty for so many small businesses who have been negatively impacted.”
Even as parts of the country begin to reopen, the latest U.S. Census Bureau data from late June showed 43% of small businesses are continuing to experience income declines. Tax Day may be the last thing on your mind. And you’re not alone. Anne Zimmerman, small business CPA and Co-Chair of Small Business for America’s Future (SBAF) said “This is an incredibly stressful time for small business owners. The most recent SBAF survey showed that 13% of them have considered bankruptcy. They have lost the last three months to the crisis and they’re scrambling to stay alive.” Even though the IRS extended the federal tax deadline to July 15 to give filers some breathing room during this national crisis, Anne says small business owners “have not had a lot of time to prepare for tax season.”
If you’re struggling to complete your small business filing during this stressful tax season, here are five things to be sure to remember.
1. Carry any net operating losses backwards.
The Tax Cuts and Jobs Act mandated that any net operating losses arising after 2017 could only be carried forward, not applied backward to taxes paid in previous years. However, recognizing the potential for devastating losses in 2020, the CARES Act reversed this. That means if you had a net operating loss in 2019, you can now go back and apply it to any tax paid in the five prior years in which you had a profit. In other words, you can get an immediate refund of prior taxes—acting as a sort of “hidden stimulus” for your business.
2. Take your qualified business income tax deduction.
While big businesses got a 40% cut on their tax rate through the 2017 Tax Cuts and Jobs Act, small businesses were less fortunate. However, if your business fits certain criteria—i.e., is a sole proprietorship, partnership, S corporation or LLC—and you have pass-through income, you may be eligible for a 20% deduction. Note that capital gains, dividends, interest income and income earned outside the U.S. are all excluded from the definition of “qualified business income.” While this temporary deduction pales in comparison to the tax cut for large corporations, every bit counts for small business owners during this time of fiscal uncertainty.
3. Contribute to your IRAs.
Here’s a sobering statistic: One-third of small business owners don’t have any retirement plan for themselves. As a small business owner, making tax-deductible contributions to an IRA or other account is one of the best ways to save up for your future—and that of your enterprise. Fortunately, when the IRS extended the tax filing deadline to July 15, it also extended the deadline for contributing to IRAs and other accounts. So for the next few days, you can still make tax-deductible contributions to your traditional or Roth IRA, health savings account, or—if you’re self-employed—to a Simplified Employee Pension or solo 401(k).
4. Be prepared for a big bill.
Even with the deductions and provisions outlined above, you may still owe federal taxes on your 2019 filing. Additionally, the deadline for estimated taxes on the first and second quarters of 2020—which some business owners and self-employed entrepreneurs are encouraged to pay—also falls on July 15. For some, that will mean a sizable bill. Though estimated taxes for this year are likely to be lower due to the pandemic’s effect on revenue, you should be prepared for a substantial hit to your balance sheet as all of these payments come due at once.
5. File an extension if you need even more time.
If you just can’t pull together all the necessary documentation to file your federal return by Wednesday, consider filing for an extension. The process is relatively simple—just one form—and can grant you another couple of months to complete your return. It’s vital to note that, even with an extension, you’re still required to submit payment (if owed) for 2019 and estimated tax in the first two quarters of 2020. Still, this option can be helpful if you need more time with the paperwork, but want to avoid late filing penalties.
As a small business owner, you have plenty on your plate. With these five tips, you can simplify the federal tax filing process and focus on what really matters: getting back in business.