Now that the holidays are over, it’s time for most businesses to address what the first quarter typically ushers in: tax filings. The 2021 Q1 tax season may, however, carry an added element of complication to it. Tax officials announced a 50% increase in the number of specialized auditors hired to pore over small business tax returns. Business owners will do well to be prepared with meticulous records of income, expenses, and deductions in the event they’re tagged for an IRS examination.
A business may wish to take advantage of whatever time is available to double-check tax returns for accuracy. Preparing a return that complies with complex tax changes is more important than sending in an incomplete filing that may fall into the hands of a new auditor. The increase in IRS auditors means there’s a greater chance that a return may be chosen for an examination even if the company never faced an issue before.
Expect a Growing Backlog of Unprocessed Tax Returns and New PPP Complexities
COVID-19 concerns, social distancing, and lockdown orders created unprecedented bureaucratic and workflow problems; the IRS was not left unscathed. Closed offices, lost mail, and a pile-up of unprocessed returns have become somewhat the norm, or at least, unsurprising. Nearly seven million individual tax returns remained unprocessed in February of 2021. It may no longer be uncommon for a business to receive a notice that includes failure-to-file penalties with interest due while an untouched return remains sitting in a mail bin or on an IRS processing center desk.
Ongoing changes were made to the tax codes to accommodate how the Paycheck Protection Program loan proceeds will be treated and ultimately processed. A delayed start for the tax filing season provided the IRS with time to program and test its processing systems and determine their readiness to handle the influx of PPP-related filings. The postponement, however, may not provide all business owners with an overabundance of time to work through all of the new filing requirements.
Auditors’ Focus May Be on PPP Loan Proceeds
The types of information newly hired auditors may be looking at include the employment tax deduction and employee retention credits. The examiners may be paying close attention to the business loans issued in response to the COVID-19 pandemic. The funds received must have been spent on payroll, rent, mortgage, or utilities for the loan to be forgiven. Employers who applied for pandemic relief may be required to verify their payroll and employees’ records.
If PPP loan proceeds were not spent as required, business owners must repay the loan with 1% interest. Businesses intending to apply for loan forgiveness will need to prove that the funds were allocated as intended. However, the comprehensive application process reportedly showed numerous discrepancies when recipients applied to request forgiveness and submitted records detailing how the loan was used.
There May Be Unexpected Issues Involving PPP Loan Forgiveness
The $2.2 trillion CARES Act that Congress passed in March of 2020 included $350 billion worth of forgivable loans to small businesses. As long as proceeds were spent on employee paychecks, they could be forgiven. Employers who used at least 60% of their PPP funding to maintain payroll and issue regular paychecks could apply for that portion of the loan to be turned into a grant.
PPP loans that meet the requirements of forgiveness are not being taxed at the federal level. However, more than half of the states consider the portion of forgiven PPP loans as taxable income. Local legislatures may have rushed to pass a law prohibiting business owners from deducting the expenses covered by a PPP loan on their 2020 state tax returns. Small business owners located in states that have not yet finalized their PPP loan and forgiveness rules may prefer to file an extension of time to prepare a return beyond the deadline.
Revised Plans May Be Needed for Loan Repayments and Countering Pandemic Losses
If the end-of-year holiday season resulted in more unsold inventory than expected, loans obtained to purchase that inventory coupled with possible tax liabilities could add up. An experienced finance broker can, however, help to obtain substantial funding that can serve to overcome a pandemic-related crisis. A seasoned broker can also help position a business for a sale or a strategic acquisition if it appears it may be in serious trouble or not pass a tax audit.
An accounting broker can provide valuable assistance to businesses overwhelmed by the complexities of new tax rules or the filings required after receiving pandemic relief. What an owner may have previously noted as a regular deduction may turn into an unexpected income tax liability if a PPP loan was involved. The proceeds received through PPP loans may, however, be forgiven. Alternative financing arrangements may also provide welcome relief in addition to enabling opportunities for future growth.
LQD Business Finance has been serving businesses throughout the pandemic and beyond. As a trusted partner, LQD Finance has been providing businesses with alternative financing arrangements to boost cash flow. LQD Business Finance helps businesses review their finances in order to make the best decision that produces customized results. Get started or have your questions answered by submitting a quick online contact form to our finance team.