TAX HITS TO PANDEMIC CLOSED BUSINESSES
January 27, 2021 - Douglas Myser
Tax hits to pandemic closed businesses. Thousands of small businesses have shut down because of the COVID-19 pandemic. Adding insult to injury, many are facing tax hits as they wind down. Small businesses have felt the brunt of the COVID-19 pandemic, with thousands of enterprises forced to close since the beginning of the pandemic. As if going under because of a pandemic isn't bad enough, some will face tax hits from their closures if they aren't careful. Moreover, some are left wondering what to do with their COVID-19 loans and grants. As a result, instead of being able to walk away after closing up shop, they're forced to navigate taxes and potential penalties. "The last thing people think about when wrapping up a business is their tax obligations," "They are running at a loss, they didn't generate any taxable income. But there are still a lot of tax implications." Forgiven debt is taxable income in the Internal Revenue Code, and a taxpayer is issued a 1099-C for the amount of the debt, then has to pay taxes, just like it was self employed income. Most individuals don't know about forgiven debt and are shocked at the fact that after losing everything they have, they are now going to be straddled with a large debt. We end up with clients who need tax resolution services as a result. Tax hits to pandemic closed businesses.
Payroll Protection loans may be taxable. In the early days of the pandemic, the federal government released more than $2 trillion in aid under the CARES Act, with tens of billions of dollars going to help small businesses stay afloat. Under the act's Paycheck Protection Program, small business owners received loans that were forgivable if they used the money to keep workers on the payroll. Despite all these efforts, thousands of small businesses couldn't survive. Now they're left wondering if they have to pay taxes on the money they received or, worse, pay back the loans. "As currently written in the CARES Act, PPP Proceeds are not taxable, but the IRS made a determination in notice 2020-32 that indeed it is taxable in a back-ended way. Under the IRS rules, PPP borrowers can't deduct the expenses they incur to qualify for loan forgiveness.