Is a small business tax crisis looming?

I am increasingly concerned about the possibility of a small business crash ahead. The early warning sign is the difficulty I see in so many small business client in making their last year’s tax payments. This year, more than half of my small business clients than ever before cannot currently meet their 2021 sales tax, wage tax, real estate tax and/or income tax payment obligations. With the recent news of collapse of the Build Back Better recovery plan, the local small business mood is pretty glum.

Tied to industry and size, not region

News reports seem to indicate that we are in an expanding economy with robust price increases, yet operating margins for many of my clients are insufficient for them to stay in business. Ditto for nonprofit clients who tried but mostly failed to obtain expanded funding for 2022. The business patterns I see now in my small business accounting practice in the Philadelphia/South Jersey area right now plainly do not align with what we read in the news. At first I thought that it might be a regional issue. But closer examination shows that it is likely related to industry. A peer pointed out the correlation to business size. Larger firms in the same industry appear to be doing better than micro-businesses in managing their operating margins.

Bankruptcy ripple effect

Over this past weekend, another client in the commercial marine industry told me that he had filed bankruptcy. It disturbed me that we did not discuss it earlier. It brought back bad memories of the 1990s construction clients who went out of business in the aftermath of the Trump Atlantic City bankruptcy fiasco decades ago. I relied on verbal assurance from him that payment was coming and got burned in the end.

This news means that I didn’t learn my lesson and I won’t be getting paid from them now. This will further adding to my accounting practice losses for 2021 where I had so much more in unpaid work – ranging from outright deception to unforeseen circumstances – that I can not currently accept work that is not prepaid. The current situation is worse than anything I’ve experienced my 4+ decades working with small businesses.

Local jobs effect

Normally my own diversification of professional services, recreational services and food services would provide diversification. But not this year. These past two years they all collapsed together.  We have been unable to hire anyone due to the cash crunch despite the dire need for help.

Our small marina and seafood businesses at the rural South Jersey bayshore are still closed since the start of the pandemic with no funding approved to address the physical damages, looting of copper pipes and theft from early in the shutdown. Almost two years of loan applications to SBA, Department of Agriculture, Department of Transportation and other agencies produced no results for the small businesses that operate here. Meanwhile, millions are flowing in for the large firms. We have huge reconstruction contracts underway here now that have no benefit on the small local firms. Our tax bills will continue to pile up until we receive recovery funding or go out of business. Five of our business properties go to tax sale this month because I was unable to meet 4th quarter 2021 tax payments. With total real estate taxes as our #1 largest expense, this is a serious concern.

Tax payment effect

Bluntly, I don’t expect that any small businesses in this client group even anticipate meeting 2021 income tax obligations for this next quickly approaching tax payment deadline. What will this mean? For real estate tax, it means that the clock is ticking toward a forced property sale date. Real estate tax debt accumulates at 18% interest in our state. For wage and income tax, it means a huge increase in the need for representation without the means to pay for that representation service. I’ve taken on two pro bono income tax delinquency representation cases already this year and cannot continue in that direction. For sales tax, the consequences are largely up to the individual revenue agent. Frankly, I don’t know why that haven’t put a lock on the door of businesses that haven’t paid sales taxes in more than two years.

Meanwhile, most of our local work force is still looking for basic emergency funding to reopen their businesses closed for the pandemic. I think that needs to be addressed first and then address taxes later. I hate to think of what will happen to our community if these ‘backbone’ businesses do not reopen.