Andrew Van Dam / Washington Post

How permanent job losses threaten to transform temporary covid closures into a lasting recession

https://www.washingtonpost.com/business/2020/08/25/permanent-economic-damage-piles-up-covid-crisis-is-looking-more-like-great-recession/

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.

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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.

Information from the Federal Reserve Bank of St. Louis.

Click link to view map with bank details: https://research.stlouisfed.org/maps/failed_banks.php

Failed Banks 10/22/2014 Assets
	$6,300,000.00 – $1,520,000,000.00
	$1,520,000,000.01 – $6,100,000,000.00
	$6,100,000,000.01 – $13,000,000,000.00
	$13,000,000,000.01 – $32,010,000,000.00
	$32,010,000,000.01 – $307,000,000,000.00

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.

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.

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.