“Time and the hour run through the roughest day,” wrote William Shakespeare over four centuries ago. Had he lived during our present-day plague, what might he have written? Indeed, 2020 was a very challenging year for everyone. Outside of individual health risks, most businesses were sorely impacted.
Amidst the COVID-19 pandemic many were forced to shut down, causing an economic disaster for hundreds of thousands of business owners and their employees. The IRS’s ever-changing tax policies added even more uncertainty and consternation.
In the following article, I have examined what amelioration the IRS offers business owners who owe taxes and how COVID-19 has impacted even these policies.
To help out taxpayers last year, the IRS extended tax-related deadlines due to the Coronavirus pandemic, which automatically extended the deadline to file and pay 2019 taxes from April 15 to July 15, 2020. Additionally, taxpayers could use the Form 7004 to extend the deadline from July 15 to October 15, 2020.
Other than these options, the taxpayer should file and pay their taxes. However, if the taxpayer did not or cannot pay, the IRS may delay the collections process.
Many business owners will struggle to pay taxes in 2021 as well, so here are a few options for people who did not or cannot pay their taxes.
In a recent article I wrote about individuals with tax liabilities and the options they have. Business owners also have options.
If you have the means, the quickest way to move on is to pay the tax liability off. The safest course of action is to figure out the correct amount of your tax debt and file immediately so you can again focus on growing your business.
I have pointed out that individually, a taxpayer ducking or running away from the problem – while an option – would be an unwise decision. As a business owner it would be filed in the category of an extremely unwise decision.
Ignoring the debt will ensure that your business and other assets are never safe, plus the penalties and interest will continue to mount. If paying in full or running away do not sound like viable choices for you, there are decidedly better payment options.
If you think you can pay in full with just a little more time, there is an option to ask for an extension of 120-days. It’s understandable, however, with the fluidity of our current COVID-19 situation, the taxpayer may not know if paying in 120 days will work.
The IRS has set up some different payment plans. The business owner can choose:
Unlike the rules for individuals, businesses could qualify to apply for a payment plan online if they chose a long-term payment plan (installment agreement); the business has filed all required returns and owes $25,000 or less in combined tax, penalties, and interest.
Because of COVID-19, some business cannot make their tax payments. If this is true, then the IRS may consider the business owner under currently not collectible ("CNC") status. This means that the IRS will review the business financials in detail and determine the owner’s ability to pay. If the IRS deems the business owner to be CNC, then the IRS will not require any payments for the time being.
The IRS will continue to review the business financials every year until the situation improves, and at that time, the IRS will expect the business owner to begin making restitution.
It is important to note that given a CNC status, penalties and interest will continue to accrue on the tax balance until it is paid. In addition, in most cases the IRS will file a tax lien.
Another payment arrangement is for an offer in compromise. An offer in compromise is a settlement to pay less than the full amount of tax debt owed. The IRS will generally approve an offer in compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period of time.
To help contend with the side effects of COVID-19, the federal government, the Treasury Department, and the Small Business Administration (“SBA”) have created programs to help business owners.
First, there is the Paycheck Protection Program (“PPP”) that gives a forgivable SBA-backed loan to help small businesses meet payroll costs. I have written substantially about this subject and its tax implications in previous installments.
Another program I’ve explored is the Employee Retention Credit ("ERC"). This part of the CARES Act gives employers a fully refundable tax credit worth up to 50% of qualified employee wages up to $10,000 paid to employees after March 12, 2020, and before January 1, 2021. Therefore, the maximum tax credit for wages paid to any employee during this time period is up to $5,000.
In practice, employers are eligible for this tax credit if they have partially or fully suspended operations during 2020 due to government orders of the suspension of travel, commerce, meetings, and more, or if they had a significant decline in revenue.
For larger companies with more than 500 employees, employers must now give paid sick leave to employees affected by COVID-19. To help cover those costs, the employer may get a refundable tax credit to cover the cost of the leave if the employee:
1. Is under quarantine or isolation order
2. Has been advised by a health care provider to self-quarantine
3. Is experiencing symptoms of COVID-19 and is seeking a medical diagnosis
4. Is experiencing any “substantially similar condition” specified by the U.S. Department of Health and Human Services
5. Is caring for a family member who is subject to quarantine or isolation orders or has been advised by a health care provider to self-quarantine
6. Is caring for their child if the school or place of care is closed or childcare is unavailable
One important note about the Emergency Paid Sick Leave and Emergency Family and Medical Leave Expansion acts and the Employee Retention Credits is that they can be taken together, but not for the same wage payment.
Keep in mind the IRS is not in the business of giving tax dollars away for free. With the necessity of tax relief programs however, federal and state governments are already looking for money to fill the gap somewhere else.
Due to many businesses and employees being forced to work from home, some people have moved to different states than where their workplace is located. Perhaps this commute across state lines is not new, but now their work from home (State B) is not taking place where their work is located in State A.
This has created a lot of confusion on who to pay taxes to. According to Bloomberg Law, “it is generally accepted that telecommuting employees can create ‘nexus’ on behalf of an out-of-state business, potentially leading to various tax obligations in a new state(s), including payroll taxes, income taxes, sales/use taxes, and various local taxes, among others.” Therefore, employees working and living in a new state can mean that the out-of-state employer has a nexus with the new state.
For payroll taxes, this means that businesses need to figure out whether employee relocations create new withholding requirements. Some states, like New Jersey, have issued guidance on their payroll nexus standards, while others have not.
For income taxes, business’s tax liability is based off of nexus and apportionment. The nexus can be established by the presence of employees or company property, while apportionment will be established by formulas regarding payroll and property factors.
“In some jurisdictions, even a single employee working in another state may be enough to create nexus, meaning a sufficient connection between a state or municipality and a business that allows the state or municipality to impose a tax on the business.” The more employees there are in a given state means the easier it is to find a nexus.
A business owner who owes taxes to the IRS has options, perhaps more than ever due to our present-day pandemic. If you owe money to the IRS, our office can help you choose the best option for your situation.
Consider us a tax-debt vaccination for your business. Set up an appointment with one of the senior attorneys at Brotman Law. We can protect you from tax liabilities and the often confusing aftermath in the near and distant future.
"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."
-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist
Last updated: March 25, 2023
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