How COVID-19 May Impact Your Taxes
Coronavirus Stimulus Laws Passed in 2020 May Lower Your Taxes
It’s not an overstatement to say that COVID-19 has impacted nearly every aspect of our lives, so it makes sense to expect that it is also going to leave its mark on our taxes this year, too. In response to the pandemic, the government instituted new laws such as the Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) and the Families First Coronavirus Response ACT (FFCRA), in the hopes of providing citizens with some economic relief in these hard times.
If you took advantage of any of these stimulus programs, then your 2020 individual tax return and/or business tax return may look different this year.
COVID-19-Related Tax Issues for Individuals
Let’s begin by taking a look at COVID-19 tax implications for individuals and families.
Your Stimulus Payment
If you received an economic impact payment in 2020, this is a refundable tax credit, meaning you don’t have to include it as taxable income on your 2020 federal income tax return. And while the law doesn’t require you to pay back any stimulus payments you may have received, be sure you keep a notice with your tax records that you received the payments.
Required Minimum Distribution (RMD) Waivers
One of the benefits of the CARES Act was that it provided several provisions making extra funds available from retirement plans. However, this provision didn’t come without tax consequences.
Older taxpayers, and beneficiaries with inherited accounts, were not required to take a minimum distribution (RMD) from their IRA and retirement plans in 2020. Anyone who had already taken their distribution in early 2020 was given the opportunity to return their funds so long as it was returned to the account by August 31, 2020.
If you were one of those people who took an early distribution and returned it on time, or if you didn’t take your RMD at all, then it won’t be included in your taxable income for 2020. However, if you didn’t return the RMD, whatever amount you took out – including any tax that was withheld – is considered a proper distribution from an IRA and will therefore be considered taxable in 2020. On the plus side, any withholding tax that you paid can be applied to 2020 taxes.
Retirement Plan/IRA Distributions
Another provision that came with CARES Act is that, if you’ve taken an early withdrawal of funds from your employer’s retirement plan, 401(k), or IRA during 2020 for specific coronavirus-related reasons, up to $100,000 of those funds can be withdrawn without you being required to pay the additional 10% tax on early distributions.
You’re required to repay any distributions that you took over the next three years, meaning that you must include that amount in your income tax for each year that you repay. Additionally, you can choose to include your entire distribution in your income for 2020 if you’d like, though this will increase your tax liability for the year.
We recommend asking a professional tax advisor for specific details on when your payments must be made.
Retirement Plan Loan Relief
The final CARES Act provision we’ll discuss here is the retirement plan loan relief provision, which grants you an additional year to repay any loans you took from eligible retirement plans. So, if you have any loans outstanding on or after March 27, 2020, then any repayment amount due from that date to the end of the year may be delayed for up to 12 months.
While this won’t affect your 2020 taxes, be aware that interest will continue to accrue on the balance of your loan and will not be tax-deductible down the road.
Covid-19 Tax Issues for Small Business
Next, we’ll examine the tax implications of COVID on small businesses.
Paycheck Protection Program Loan Forgiveness
The Paycheck Protection Program, commonly known as a PPP loan, was an SBA-supported loan program specifically for businesses that were affected by COVID-19, though it has ended. If your business received a PPP loan, there is a chance that you’re still able to apply for forgiveness, though only if you apply within 10 months of the covered period.
One of the benefits of the PPP loan is that, once the loan is forgiven, it doesn’t have to be included in the business’ gross income for federal income tax purposes as they are not counted as taxable income. However, the flip side of this benefit is that any expenses covered with the PPP loan funds will not be considered as a tax deduction when filing your taxes.
Employee Retention Tax Credit
Under the CARES Act, any business that has been forced to suspend, even partially, their operations or who have suffered a significant decline in revenues due to COVID-19, was eligible for the Employee Retention Credit, which is essentially a refundable tax credit. The tax credit is equal to 50% of qualified wages for employees per calendar quarter up to $10,000, meaning the maximum credit per employee is $5,000. By not withholding your share of Social Security taxes, your business can take the tax credit out against those taxes.
It’s important to note that your business is not required to take the Employee Retention Credit. Additionally, should you elect not to claim the credit in one calendar quarter, that doesn’t disqualify you from being able to claim the credit in a subsequent calendar quarter.
You’re prohibited from deducting the amount of your tax credit as an expense for your 2020 business tax return. However, any amount you do receive won’t be included in your business’ gross income for federal tax purposes.
SEE ALSO: RMD Strategies to Reduce Taxes
Deferral of Tax Credits for Sick Leave and Family Leave Payments
In order to help cover the cost of providing employees with required paid sick leave and expanded family medical leave due to COVID-19, Congress passed the 2020 Families First Coronavirus Response Act (FFCRA), which gave qualifying small businesses refundable tax credits. You qualify to receive tax credit payments for any payments that you made to individuals to cover sick leave or family leave expenses relating to COVID-19 situations. You can also receive payments to cover any funds used to maintain health insurance for eligible employees. These credits are also available to any self-employed business owners who have needed to take sick leave or family leave for reasons related to COVID-19. In order to claim your credits, use Form 941 for your quarterly employment tax return.
Please note, though it was previously announced that employees could spread out withholding for the deferred employee taxes in the first four months only, this is no longer the case. Employees can now spread out withholding for the deferred employee taxes throughout 2021.
When it comes to employees, any payments made under this program are taxable to them and are also subject to withholding of FICA taxes and federal income taxes. For employers, you must include the full amount of credits for qualified employee leave wages in your business’ gross income for the year. Any payments made to cover your own personal qualified sick and family leave wages can be deducted as a business expense. The amount of federal employment taxes before reduction by the tax credits is the proper amount that can be deducted by the employer.
This program is complicated, and the eligibility requirements and varying time limits can make taking advantage of these tax credits difficult. We recommend speaking with a tax advisor or referencing this comprehensive article from the IRS, should you have any questions.
Deferral of Employer Portion of Social Security Tax
One of the provisions benefitting businesses that came out of the CARES Act is the ability for businesses to defer the employer portion of FICA taxes during the year 2020. These deferred amounts may be deducted from required FICA tax payments, though they must be reported in the quarterly wage and tax report (using Form 941). Half of any deferred amount must be paid by the end of 2021 and the remainder by the end of 2022.
If you’re self-employed, then you were allowed to defer up to 50% of your Social Security tax payment on your net earnings from self-employment for the period running from March 27, 2020 to December 31, 2020. You’re able to claim the credit on your 2020 tax return. Your re-payment schedule for any deferred amounts will be the same as for employers.
Depending on which type of accounting system a company uses (cash or accrual), a company that elects this deferral is entitled to some type of tax deduction for those taxes. For businesses on a cash basis, they’re entitled to the deferral in the tax year the payment is made. Whereas, for businesses on an accrual basis, they’re entitled to a deduction in the tax year the payment is due. For all businesses, the deferral is coordinated with the credits for paid leave under the FFCRA and the employee retention credit under the CARES Act.
Though this article covers several provisions that have come from coronavirus-inspired legislation, this is by no means an exhaustive list. COVID-19 has significantly impacted the health of businesses all across the world, as well as the financial health of individuals and families. With so many ensuing laws intended to provide relief, there have been a great many legal changes that could directly impact your taxes.
There is no doubt that this tax season will be particularly layered and complex. Since every business' and individual’s tax situation is unique, getting help from a professional tax advisor can make navigating this rocky terrain much easier. Before you make any serious tax decisions or finalize your tax strategy, we suggest sitting down with a professional and making sure that you’re considering all of your options carefully.