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

By Laura Saunders

Updated Aug. 21, 2020 9:32 am ET

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.


Are you a small-business owner? Are your taxes changing because of the pandemic? Tell us about it in the conversation below.

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.

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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.

Small-Business Survival Guide

Read more from the Journal’s survival guide for small businesses navigating through these difficult times.

Covid-19 Shuttered More Than 1 Million Small Businesses. Here Is How Five Survived.

Pandemic’s Cruel Joke on a Small Business: A Busy Bike Shop With No Bikes to Sell

How Coronavirus Is Hitting Small Businesses Near You

Watch One Cleveland Restaurant’s Choices Ripple Through the Economy

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.

Economic Recovery Forecast for Small Businesses

A WSJ story featuring our president, Raymond Greenhill, discussing impacts and forecasts on small businesses during our current downturn. From Small Businesses Brace for Prolonged Crisis, Short on Cash and Customers

An estimated 1.85 million U.S. businesses closed their doors or temporarily suspended operations in the second quarter, according to Oxxford Information Technology Ltd. in Saratoga, N.Y., which tracks roughly 32 million U.S. businesses of all sizes using data from credit bureaus, surveys and government sources.

Raymond Greenhill, Oxxford’s president, forecasts that total losses this year will be greater than in the last recession, when 20%, or roughly 4.5 million businesses, disappeared in just over a year. He added that some of the losses will be offset by new business formation.

Community Resiliency of Bank Branch Networks

This is a look at the resiliency of bank branch networks for holding companies with $1 billion or more in deposits. The Community Resiliency Estimate provided by the US Census department is defined as:

Community resilience is the capacity of individuals and households to absorb, endure, and recover from the health, social, and economic impacts of a disaster such as a hurricane or pandemic.  When disasters occur, recovery depends on the community’s ability to withstand the effects of the event. In order to facilitate disaster preparedness, the Census Bureau has developed new small area estimates, identifying communities where resources and information may effectively mitigate the impact of disasters. 

Using the Census Resilience estimates by county and tract, along with the Statement of Deposits for branch data from the FDIC, a deposit weighted score was calculated for each branch as the product of the branch deposits and the resiliency score for the county in which the branch is located. Next, the branch scores were normalized for the bank. Finally, a score for the holding company was calculated using the weighted score of the holding company’s banks.

The table below shows the results by holding company. As states and municipalities remain in flux on closing and opening their local economies, a bank’s branch network will be impacted based upon the resiliency of the local market to react to the COVID-19 pandemic and the relative risk amongst banks will differ based upon the geography of their networks.

A final note behind the methodology:

— Branches within a holding company were excluded if the county, the resiliency score and/or the service type of branch (non-full service beanches are excluded).

— Assigning resilience by county to a branch is less precise than assigning resilience based upon the local branch market area. A better measure could be calculated by analyzing the branch markets by tract and assigning the weighted score by tract.

— County are assigned scores as follows: 0 = Population with Zero Risk Factors; 1.5 Population with 1 to 2 Risk Factors; 3 = Population with 3 or more Risk Factors

US Unemployment by County (April 2020 Preliminary)

Here’s a look at the 14 month trend in unemployment in descending order by April 2020 unemployment rate (preliminary) .

The maps shows where the high unemployment rates cluster.

COVID-19, Economic Cost , Outcomes and Beliefs

The Federal Reserve of St Louis has an interesting working paper, “Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19” , that takes a look at the economic costs and impacts from mitigating bankruptcies and changes in behavior.

The key statements from the paper are :

  • A policy that avoid most permanent separation of workers from capital could generate a much larger benefit than originally thought, that could easily be 180% of annual GDP, in present value.
  • … policies that help prevent depreciation or obsolescence, even if it has only modest immediate effects on output, can have substantial long-run benefits, an order of magnitude larger than the short-run benefit that policy makers typically consider.
  • Take the example of a restaurant, Its kitchen may still be in use but its dining area is unproductive capital , on which it is earning zero return. A key question is then whether that capital is gone for good.
  • What sound policy might avoid is the prospect that, after seeing how fragile our economy is to pandemic, firms will be scarred and will never think about tail risk in the same way again.

As a working paper, the paper is technical but still a thoughtful read in how to frame and quantify the economic and policy decisions in light of COVID-19 and similar long-tail events.

Cash Availability by Industry May 2 – June 6 Small Business Pulse Survey

Here’s a quick look at Cash Availability of small businesses according to the US Census Small Business Pulse Survey.

The trend shows improving cash conditions since May 2nd when the survey first started. This would be consistent with intervention by the Treasury and the SBA programs supporting small businesses , for example, PPP.

COVID-19 Trends and Bank Branch Deposits — Top 100

In the process of working on some branch deposit data, I thought it might be interesting to look at the largest US banks’ branch network and how their branches are distributed according to the rate of growth of COVID-19 cases.

The analysis below shows the percentage of branches in counties which are seeing accelerating rates of COVID-19. The acceleration is calculated from the 3 day change from June 10 to June 7th compared to the 3 day change of June 9 to June 6th. The analysis also shows the branch deposit dollars in those accelerating counties.

A few caveats on the data: only full service branches were included in the analysis; the branch deposit and location data is the latest SOD data provided from the FDIC reflecting deposits as of June 2019. The June 2020 data will likely not be available until Q4 of 2020; branches that do not have valid counties or calculated COVID-19 rates were excluded.; COVID-19 data provided by the NY Times.

The table shows that certain banks are more at-risk based upon their served geographies and how COVID-19 is trending. While outside the scope of this simple analysis, it would be interesting to explore impacts on customer retention and service in highly impacted areas with closed or reduced full service branches. With no access to the local brick and mortar branch, would customers have a higher propensity to switch to a competitor because of a superior online product/service?

State Coincident Indexes

A visualization showing impact of COVID19 on economic indexes.

The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states. The indexes are released a few days after the Bureau of Labor Statistics (BLS) releases the employment data for the states.