The old “death-and-taxes” adage may be neglecting another one of life’s absolute truths: the inevitable mass anxiety that comes hand-in-hand with tax-filing season every year. Particularly in the past few years, a small business owner’s challenges for tax filing have been exacerbated by so many complications: temporary COVID-related policies, new Biden-era legislation and the work required to stay ahead of how each could affect your finances. As inevitable as tax season anxiety may be, guidance is always around the corner for those who seek it.
So what are the most pressing questions being levied by small business owners today? The rollback of several temporary benefits is a common theme, with a few topics dominating the conversation, so far.
Child Tax Credit
Business owners who are parents and take pass-through income might be in for a surprise when they file April 15. Pandemic-era tax relief for parents has been reduced, with the federal Child Tax Credit shrinking from $3,600 per dependent to $2,000 per dependent for most taxpayers. Business owners who benefited from this extra deduction in the 2021 tax year should take this into account when forecasting their short-term finances.
Employee Retention Credits
Small business owners may also be under the assumption they can qualify for the Employee Retention Credit again, another COVID-era tax-relief measure. This benefit, however, was retroactive; only employers who retained their employees during peak pandemic months were eligible to access the credit by reducing employment tax deposits they were already required to make. While many likely qualified at the time (March 2020 through January 2021), this type of credit will likely not be coming back anytime soon.
Other Expiring Tax Code Changes
Other modifications to the federal tax code that were put into place during the pandemic have expired or will expire this year. For example, taxpayers no longer have the option to carry back net losses, a strategy that helped businesses apply losses to a prior tax year to reduce taxes owed or earn a refund. Even larger companies and corporations are feeling the effects of some of these rollbacks, such as the reduction of charitable contribution deductions from 25% to 10% of taxable income.
Third-party Payment Platforms
Perhaps the most notable conversation surrounding small business taxation this year involves the increased scrutiny of transactions made through third-party payment platforms such as Venmo, PayPal or Cash App.
When the Internal Revenue Service initially announced that payment apps must report transaction activity (and that the apps must provide Form 1099-Ks to users), a mild panic spread among business owners and payment platforms alike. There was little time to prepare and much still to be explained about the new process, they said.
The good news is these changes will no longer be enforced this year. Given a lack of guidance on how to differentiate payments for goods/services from friendly transfers, this requirement has been pushed back to begin in 2024 for the 2023 tax year. While this is a nice buffer for business owners who may have been scrambling to organize their records, it’s imperative that specific information be included on all such transactions moving forward. Business owners should speak with their tax professionals about this.
Investing in a Tax-Prep Arsenal
With so much information to keep track of on a yearly basis, small business owners can easily fall into a swamp of extra work during tax-filing season. Their best friend, and likely the most important investment they can make, in these situations is the services of an experienced outside bookkeeper. They are the primary resource that small business owners can use throughout the year to prepare for the turbulence of tax filing. Strengthening that relationship by tapping into a software platform like Xero, small business owners can also give themselves a better understanding of where their business stands at any time, eliminating the scrambling and enabling a more robust and seamless process come tax season.
Utilizing cloud technology in the bookkeeping process can help support a fully connected financial ecosystem for the business. Cloud software (including a core system and related third-party apps designed to integrate with it) enables real-time data sharing between all entities involved: the business, bookkeepers and even banks. For example, cloud software that supports bank feeds allows small businesses and their bookkeepers to connect their accounting software to their bank accounts so that transaction data automatically flows into the software – making for easy reconciliation and greater visibility of cash flow.
The overarching theme here is structure. With the right framework built out in advance, small business owners can set themselves up for success well before tax documents arrive.
All this considered, the human element of financial expertise can’t be forgotten. For decades, bookkeepers and CPAs have been a trusted source of tax guidance for consumers and businesses alike. While software is becoming more helpful each year, an advisor-partner also is critical to success in most cases.
You don’t know what you don’t know.
The phrase can extend to practically any aspect of life. But in the complex world of business taxes, it’s especially true. The federal tax code is not easy to understand for those who don’t study it closely (let alone state and local tax laws). This includes the audience that probably needs to understand it best: the business owner. Experienced tax professionals not only understand the tax codes, but, with the right data, can help develop financial forecasts and plans to better manage business finances at all times. A well-versed professional will treat a business’s tax planning as a year-round activity and execute strategies for business owners to take full advantage come tax-filing time.
Without a helping hand, tax filing can be, at best, a true time-suck for small business owners and a genuine legal/financial risk, at worst. For those with an entrepreneurial mind looking to grow their million-dollar idea to fruition, the last thing that should be taking up their bandwidth is catching up on their financial records. Instead, business owners can keep their gaze facing forward by making the investments in technology and people that will set them up for a smooth tax journey ahead.
Miguel Otchere-Marshall is the owner and CEO of the Atlanta-based firm Nelopy Accounting, and an entrepreneur that specializes in small business financial management.
Marc Duperval is a New York native who moved to Georgia in 2003 where he currently resides. Math was always naturally his best subject so he gravitated to accounting while in school. With a degree in accounting and 11 years in the industry, Marc now considers himself a leader in the accounting and tax space.