The world continues to change. Though everyone did benefit from the Tax Cuts and Jobs Act of 2017, certain nuances were made apparent in the wake of the COVID-19 outbreak. In a recent letter from the AICPA to Congress, the leading accounting body looked to address some of these challenges.

Future-Proofing the Tax System: AICPA’s 12 Challenges for Small Businesses

One thing noted in a recent AICPA article is that the recent pandemic has exposed a few weak areas in the tax system—especially as it pertains to small businesses. In order to build a tax system that clears the playing field, AICPA has written Congress to attempt to address the realities.

From issues regarding the home office deduction to additional barriers that stand between small business owners and a sustainable financial future, the leading accounting body documented twelve barriers imposed on small businesses in a letter to Congress.

Alternative Minimum Tax Creates Unnecessary Burdens for Small Businesses

With many businesses—even small ones operating as passthrough entities, many business owners are disproportionately hurt by alternative minimum tax rules.

Unfortunately, this results in new challenges for businesses in a non-corporate structure (such as a limited liability company (LLC)) who are subject to a dual tax system that is complex and creates unnecessary burdens.

In the letter, authors argue the following:

“Congress should repeal the AMT for individuals, trusts, and estates in order to provide consistent treatment and relief for all businesses and owners. […]

The tax system should be updated to reflect the current economic reality that many small businesses organize as passthrough entities. Many of the AMT preferences and adjustments affect business taxation and apply to individuals, estates, and trusts which create additional complexity and inequity for these non-corporate business taxpayers.”

SALT Deduction Limitations Cut Hard into Small Business and Passthrough Entities

Main Street shouldn’t be expensive. We’re not all lucky enough to live in states who have competent leadership, meaning that more often than not, the combination of state and local property taxes, individual income taxes, and sales taxes disproportionately affect small business owners—especially those operating as sole proprietorships, LLCs, or other passthrough entities.

AICPA authors note just how unreasonable the $10,000 cap is on small business owners, noting,

“Businesses in corporate form may deduct SALT, but the $10,000 limit for individuals disproportionately affects small businesses operating as sole proprietorships, LLCs, or other passthrough entities. Main street small businesses are the backbone of the economy, and employees of those businesses in large part drive spending in both the overall economy and into other small businesses.”

Syndicate Rules Prevent Businesses from Properly Deducting Losses

Especially in the wake of the COVID-19 Pandemic, many businesses could end up taking a loss in 2020. Unfortunately, as currently written, syndicate rules are outdated (drafted before LLCs became popular) and will prevent businesses from properly deducting losses experienced during a disruption. Currently losses as a result of disruption may trigger punitive tax shelter rules that will cripple businesses looking to push towards recovery in 2021.

“Many small businesses do not know that they have been unduly limited by these rules and cannot benefit from the changes enacted by Tax Cuts and Jobs Act of 2017 (“TCJA”) due to classification as a tax shelter.

In today’s environment, an LLC is a preferred business entity for many reasons (including to obtain funding from inactive owners), but then this entity runs the risk of being a “tax shelter” even though there is no tax avoidance motive.

These long-standing rules constrict, and in some cases outright disallow, the benefits the tax system provides to small businesses – such as a cash method of accounting and exemption from the complex interest expense limitation under section 163(j). 3 The rules serve more as a “trap” for small businesses who have investors, such as a restaurant, and generate a loss which may subject them to the syndicate rules and tax shelter status.”

Strict Use Home Office Rules Proven Outdated in Pandemic

Many of us have been working from home in the past few months. Whether it’s from a kitchen table or a dedicated and exclusive home office, we’ve all been getting work done. Sadly, only one of those two is an acceptable expense. Worse, if your home office happened to be below ground, you’re simply working in storage space.

Unfortunately, home office rules were written long before the realities of COVID and before the realities of the Internet.

“The AICPA recommends removing the strict use requirement for the home office deduction. […] The exponential rise of telework and pace of traditional working habits in response to the COVID-19 pandemic necessitates a modern approach to the home office deduction. This outdated requirement is highlighted when COVID-19 forced more people to run many aspects of their personal and working lives from a laptop computer and smartphone. But such combined use prohibits deduction for any space where that computer or phone are used.”

Getting rid of the strict, “exclusive-use home office” rule is a necessity and can help small business owners recoup costs—especially as more move away from traditional offices in the wake of the outbreak.

Get to Know Controllers Council

The world continues to change, and for small businesses, the tax code often doesn’t reflect these changes. We’re happy to see that the AICPA is taking steps to help small businesses and the leaders keep more of their money. Stay tuned for our look into the other recommendations and follow us to keep up with all the latest.

View part 2 here.

Additional Resources

Should Controllers Anticipate More Tax Reform in 2020?

FASB Delays RevRec and Lease Adoption for Private Companies

Controllers Guide to the SECURE Act