Category Archives: Taxes

Relatively few small businesses aided by COVID tax relief

Relatively few small businesses aided by COVID tax relief

By Michael Cohn from Accounting Today August 03, 2022, 2:08 p.m. EDT 4 Min Read

Small business owners have been hampered by complicated tax forms and processes that kept them from claiming pandemic-related tax credits and payroll tax deferrals, according to a new government report. Only up to 7% of small business owners were able to claim the tax relief, and they fell mainly within specific racial, ethnic and gender groups.

The report, released Wednesday by the Government Accountability Office, found the tax forms for claiming the paid sick and family leave credits and payroll tax deferrals for employers and the self-employed, as well as the Employee Retention Credit, were too complex. They had difficulty getting help from both the Internal Revenue Service and even from tax professionals.

While accountants and tax pros largely found the COVID-19 aid boosted their services to clients to help them claim Economic Impact Payments, tax credits and Small Business Administration programs like the Paycheck Protection Program and Economic Injury Disaster Loans offered through pandemic relief packages like the CARES Act, the Families First Coronavirus Response Act and the American Rescue Plan Act, many small businesses and self-employed taxpayers still had trouble getting assistance. The GAO report found limited use of the tax provisions by small businesses, with less than 7% of eligible small businesses within the study population using the employer and self-employed leave credits or payroll tax deferrals.

COVID-19 tax provisions were aimed at helping employers and the self-employed maintain payroll and address health-related leave. But we found that some small business owners struggled to use these tax provisions — partly because they didn’t know how.

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.
Andrew Harrer/Bloomberg

“Our review of relevant tax forms found that claiming the provisions was a complex process,” said the report. “Small business representatives said it was hard to get clear information from the IRS and to access professional tax help.”

The GAO recommended the IRS should evaluate how it can improve outreach to small businesses, especially when tax provisions are introduced or changed. The agency may also need to do outreach to specific populations as well. The IRS doesn’t break out the racial, ethnic and gender demographics of small business taxpayers in its statistical data, but the report nevertheless looked at the demographics of the small businesses who did receive COVID tax relief, using data from other federal agencies, other taxpayer information and analytical methods to help identify or estimate taxpayers’ demographic characteristics. The GAO analyzed the use of COVID-19 tax provisions among a study population of single-owner businesses in tax year 2020, matching the data from different agencies such as the U.S. Census Bureau and the Social Security Administration to identify the recorded sex of business owners and estimated race and ethnicity of selected taxpayers using a method that calculates the probability that a person with a given surname and residential location will identify with selected racial and ethnic groups.

For example, for self-employed leave credits, the GAO estimated that eligible Black or African American- and Hispanic-owned businesses were more likely to use these credits compared to Asian- and white-owned businesses. For the employee retention credit, the GAO found that a slightly higher percentage of female-owned and Asian-owned businesses claimed the ERC compared to other businesses filing employment tax returns.

The GAO talked to some organizations and agencies representing small businesses, and nearly all of those interviewed cited a poor understanding of the tax provisions as a potential cause of the limited use, especially among very small businesses. The information and recordkeeping requirements are another potential barrier contributing to limited use. The report acknowledged the IRS did provide information to small businesses about the provisions and used some measures to evaluate its outreach, including informal feedback and compliance data, but GAO believes those measures didn’t provide relevant and complete information.

The period of eligibility has largely passed for the COVID-19 provisions studied by the GAO, but the report points out that evaluating outreach could improve the IRS’s preparations for communicating tax relief information to taxpayers during future emergencies. That could also help with communicating about tax relief to specific demographic groups. A January 2021 executive order from the White House on advancing racial equity asked agencies to assess their programs and policies to see if they perpetuate systemic inequalities among groups, while the Treasury Department’s strategic plan includes equity goals involving outreach and education to underserved communities. The report noted that evaluation of ongoing outreach efforts could help the IRS develop information that could be useful to groups with different needs, including very small businesses and owners from various demographic backgrounds.

The GAO recommended that the IRS evaluate its outreach efforts to very small businesses and owners with diverse backgrounds, using relevant and complete information, to inform future outreach. The IRS agreed with this recommendation, but pointed to the complexity of evaluating outreach without demographic data.

“The unprecedented COVID-19 pandemic illustrates the significant role that the IRS plays in the overall health of our country,” wrote IRS chief risk officer Mark Pursley in response to the report. “We were called upon to take on new responsibilities impacting almost every American during this national crisis while also fulfilling our routine responsibilities of tax administration.”

Inflation Reduction Act potentially doubles R&D tax credit

Inflation Reduction Act potentially doubles R&D tax credit

By Michael Cohn from Accounting Today August 18, 2022, 5:10 p.m. EDT 3 Min Read

The Inflation Reduction Act that President Biden signed into law this week has a lesser known provision that could benefit many small business startups, allowing them to potentially double the amount they can claim on the research and development tax credit from $250,000 to $500,000 per year against payroll taxes.

Under current law small businesses that may not have enough income tax liability to take advantage of their research and development credit can apply up to $250,000 of the credit toward their Social Security payroll tax liability, according to Top 100 Firm Marcum LLP. To qualify for the expanded credit, the small business would need to have less than $5 million of gross receipts and be less than five years old. The Inflation Reduction Act would permit an additional credit of up to $250,000 to be applied against the Medicare payroll tax for tax years starting after Dec. 31, 2022.

The expanded R&D tax credit probably won’t show up on tax returns until 2024 since it can first be claimed for tax year 2023, but it could boost small businesses, particularly the startups that it can incentivize.

President Joe Biden signs H.R. 5376, the Inflation Reduction Act of 2022, in the State Dining Room of the White House.
Sarah Silbiger/Bloomberg

“Just by virtue of having it in this historic bill shows just how significant this credit is viewed by both sides of the aisle,” said Chris Winslow, CEO of Clarus R+D, a fintech software company that helps businesses claim R&D tax credits. “It continues a legacy of support for research and development in the U.S. This particular change is focused on small businesses, which are the cornerstone of innovation and growth in the U.S. This shows a recommitment by the federal government to support those small businesses as they expand their R&D capabilities and investment.”

He expects to see additional guidance on claiming the tax credit to be released by the Internal Revenue Service and the Treasury Department.

“More details will need to be wrapped around this, but it’s essentially raising the cap for small businesses from $250,000 today to be applied to payroll taxes, primarily FICA, to an additional $250,000 that will be allowed against the Medicare hospital insurance coverage,” he said. “Our research shows that only about half the people who are qualified to take the credit actually take the credit. I think the more opportunities to use the credit and the higher limits that people can claim will expand the overall market and and create more opportunity to fund innovation for today’s R&D customers.”

There will be some hurdles as the IRS has been increasing the requirements lately for documenting R&D activities, but Winslow noted that there have always been some requirements for documentation, which is what his software helps companies do.

“Because of the amount of credits, there is an opportunity going forward for additional requirements by the government to demonstrate the research and development activities that qualify for this credit in addition to the calculation of the credit amount,” he said. “This is what we’ve invested in heavily over the last five years is our software platform that creates efficiency for our customers to enter all the appropriate information that demonstrates their qualification under the law, but in addition creates a highly detailed compliant report that supports the requirements that the IRS has for demonstration of research and development activities that qualify.”

A September 2021 memorandum from the IRS Office of Chief Counsel said it wants more detailed information about all the business components for which the research credit claims relate for that year (see story). For each business component, companies will need to identify all the research activities they’ve performed and name the individuals who performed each research activity, along with the information each individual sought to discover. Refund claims for the research and development credit will also need to detail the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year, using Form 6765. The additional requirements have led to some consternation among companies and tax professionals (see story). But the expansion of the R&D credit under the Inflation Reduction Act should spur more interest in claiming the credits among companies, especially tech startups.

Ranking Property Taxes on the 2020 State Business Tax Climate Index

Today’s map shows states’ rankings on the property tax component of the 2020 State Business Tax Climate Index. The Index’s property tax component evaluates state and local taxes on real and personal property, net worth, and asset transfers. The property tax component accounts for 16.6 percent of each state’s overall Index score.

Property taxes matter to businesses for several reasons. First, businesses own a significant amount of real property, and tax rates on commercial property are often higher than the rates on comparable residential property. Many states and localities also levy taxes not only on the land and buildings a business owns but also on tangible property, such as machinery, equipment, and office furniture, as well as intangible property like patents and trademarks. Across the nation, property taxes impose one of the most substantial state and local tax burdens most businesses face. In fiscal year 2018, taxes on real, personal, and utility property accounted for 38 percent of all taxes paid by businesses to state and local governments, according to the Council on State Taxation.

Although taxes on real property tend to be unpopular with the public, a well-structured property tax generally conforms to the benefit principle (the idea in public finance that taxes paid should relate to benefits received) and is more transparent than most other taxes.

Taxes on intangible property, wealth, and asset transfers, on the other hand, are harmful and distortive. States that levy such taxes—including capital stock taxes, inventory and intangible property taxes, and estate, inheritance, gift, and real estate transfer taxes—are less economically attractive, as they create disincentives for investment and encourage businesses to make choices based on the tax code that they would not make otherwise. Businesses with valuable trademarks may seek to avoid headquartering in states with intangible property taxes, and shipping and distribution networks might be shaped by the presence or absence of inventory taxes.

States are in a better position to attract business investment when they maintain competitive real property tax rates and avoid harmful taxes on tangible personal property, intangible property, wealth, and asset transfers. This year, the states with the best scores on the property tax component are New Mexico, Indiana, North Dakota, Idaho, Utah, and Delaware. States with the worst scores in this component are Connecticut, Vermont, Massachusetts, New Jersey, New York, and Rhode Island, plus the District of Columbia.

Best and worst property tax codes in the country. See full state property tax code rankings in 2019.

Explore Our Interactive Tool

To gauge whether your state’s property tax structure has become more or less competitive in recent years, see the table below.

Property Tax Component of the State Business Tax Climate Index (2017–2020)
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.

Source: Tax Foundation.

State 2017 Rank 2018 Rank 2019 Rank 2020 Rank Change from 2019 to 2020
Alabama 18 12 16 15 1
Alaska 24 38 25 25 0
Arizona 6 6 6 8 -2
Arkansas 25 22 29 29 0
California 17 13 15 16 -1
Colorado 16 14 14 14 0
Connecticut 50 49 50 50 0
Delaware 11 20 7 6 1
Florida 13 10 13 13 0
Georgia 23 23 27 28 -1
Hawaii 9 16 11 11 0
Idaho 3 3 5 4 1
Illinois 41 45 40 40 0
Indiana 4 4 3 2 1
Iowa 35 39 35 35 0
Kansas 21 19 20 20 0
Kentucky 37 36 36 36 0
Louisiana 32 30 33 33 0
Maine 43 41 42 43 -1
Maryland 44 42 43 42 1
Massachusetts 47 46 48 48 0
Michigan 26 21 24 24 0
Minnesota 29 28 26 26 0
Mississippi 36 35 37 37 0
Missouri 7 7 8 7 1
Montana 12 9 12 12 0
Nebraska 40 40 41 41 0
Nevada 10 8 10 10 0
New Hampshire 42 44 44 44 0
New Jersey 49 50 47 47 0
New Mexico 1 1 1 1 0
New York 45 47 46 46 0
North Carolina 33 32 34 34 0
North Dakota 2 2 2 3 -1
Ohio 8 11 9 9 0
Oklahoma 14 15 19 19 0
Oregon 19 18 17 18 -1
Pennsylvania 22 33 22 21 1
Rhode Island 46 43 45 45 0
South Carolina 27 24 30 30 0
South Dakota 20 25 21 22 -1
Tennessee 31 29 31 31 0
Texas 38 37 38 38 0
Utah 5 5 4 5 -1
Vermont 48 48 49 49 0
Virginia 30 31 32 32 0
Washington 28 27 28 27 1
West Virginia 15 17 18 17 1
Wisconsin 34 26 23 23 0
Wyoming 39 34 39 39 0
District of Columbia 48 46 49 49 0

To learn more about how we determined these rankings, read our full methodology here.

Avalara’s Annual Sales Tax Report Highlights Major Changes for Nexus and Marketplace Law in 2020

SEATTLE, WA — December 11, 2019 — Avalara, Inc. (NYSE: AVLR), a leading provider of cloud-based tax compliance automation for businesses of all sizes, today released its fifth annual sales tax changes report. Key findings in the report point to the continued impact of economic nexus laws, escalating tensions around marketplace facilitator laws, an increase in online cross-border sales, and the growing role of technology in tax compliance heading into 2020.

In today’s global, omnichannel business landscape, accurate sales tax collection and remittance are essential for businesses of all sizes seeking to stay compliant and competitive. Avalara’s 2020 sales tax changes report reveals major changes in legislation and consumer preference that are poised to disrupt ecommerce in 2020.

“2019 was another landmark year for sales tax in the United States with broad adoption of economic nexus and marketplace facilitator laws,” said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara. “As 2020 progresses, we can expect to see more changes take place domestically and abroad in the form of marketplace laws and global compliance. This report should serve as a resource for business leaders and tax professionals to better understand the tax landscape and make more informed decisions that keep businesses compliant and improve efficiency.”

  • Many states are approaching remote sales tax differently. Economic nexus is old news and the new norm, but businesses continue to struggle with understanding their liability in each state and how to craft their tax strategies accordingly.
  • Economic nexus laws will continue to change. Louisiana is set to begin enforcing economic nexus by July 2020. A bill recently filed in Florida, if approved, will make the Sunshine State the 44th state to adopt economic nexus. If passed, Missouri will then be the only state outside of those with no general sales tax that has yet to enact a similar rule.
  • Marketplace facilitator laws are creating a “Wayfair 2.0” scenario. More than 36 states have adopted marketplace facilitator laws that require online marketplaces to collect and remit sales tax on behalf of third-party sellers. But, major marketplaces aren’t accepting this without a fight. For example, Amazon is “vigorously” fighting a sales tax assessment for marketplace sales tax in South Carolina. Other states, like Hawaii and North Carolina, are expected to enact marketplace sales tax laws in 2020.
  • International selling will take center stage and bring new challenges. Forecasted to reach $1 trillion in sales by 2020, by 2022, cross-border ecommerce sales could account for more than 15% of the world’s online retail market. Major events around the globe will impact international gain for businesses, including Brexit, fraud, global marketplace laws, and shifting tariffs.
  • Technology is responding to growing sales tax complexity. Artificial intelligence, big data analytics, and cloud computing are expected to reach a tipping point for practical application for sales tax in 2020. States are also embracing technology with 24 states participating in the Streamlined Sales Tax (SST) program and providing tax technology to businesses at no cost.

For additional information on state sales tax changes, please visit the Avalara sales tax rates resource. For more information on marketplace facilitator laws, please visit the Avalara state-by-state marketplace facilitator guide.

Download the 2020 sales tax changes report here.

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