The COVID-19 pandemic has resulted in new laws as well as changes to other laws due to coronavirus-related stimulus efforts. If you took advantage of any of these stimulus programs, they may affect your 2020 individual tax return, business tax return, or both.
Many of these tax changes come from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Families First Coronavirus Response Act (FFCRA), and the American Rescue Plan.
IRS Extends 2020 Tax Day to May 17
The Treasury Department and the IRS have announced that the individual federal income tax filing and payment due day for 2020 taxes has been extended from April 15, 2021, to May 17, 2021; the extension is automatic and no application is needed. The extension is only for individual filers (including self-employed). There is no extension on estimated tax payments that are due April 15; those payments must still be made by that date. This extension also doesn't apply to state tax returns.
COVID-19-Related Tax Issues for Individuals
Your Stimulus Payment
The economic impact payment you received in 2020 is a refundable tax credit. You don’t have to include it as taxable income on your 2020 federal income tax return. The law also doesn’t require you to pay back any stimulus payments you received even if you don’t qualify. Do keep the notice you received with your tax records.
Several CARES Act provisions have made extra funds available from retirement plans, leading to tax consequences.
Required Minimum Distribution (RMD) Waivers
Older taxpayers are required to take a minimum distribution (RMD) from their IRA or workplace retirement plan, but this requirement has been waived for 2020, including beneficiaries of inherited accounts. Those who took the distribution in early 2020 were given the opportunity to return the funds to their retirement account. The return of these funds must have been made by August 31, 2020.
Tax Effect: If you didn’t take the RMD or you returned it correctly and on time (usually through your broker), it won’t be included in your taxable income for 2020. In an email interview with The Balance, New Jersey-based CPA Gail Rosen said, “If you didn’t return the RMD, the amount, including any tax withheld, will be taxable in 2020 since it’s considered a distribution from an IRA. The good news is that the withholding tax is paid in and can be applied to 2020 taxes.”
Retirement Plan/IRA Distributions
You may have taken or are taking an early withdrawal of funds from your employer’s retirement plan, 401(k), or IRA between January 1, 2020, and December 31, 2020, for specific coronavirus-related reasons. Up to $100,000 can be withdrawn from these funds without having to pay the additional 10% tax on early distributions.
Tax Effect: You must repay the distribution over the next three years, which means you must include that amount in your income tax for each year you repay. You can also choose to include the entire distribution in your income for 2020, which will increase your tax for that year. Check with your tax professional for details on when the payments must be made.
Retirement Plan Loan Relief
Another CARES Act provision allows an additional year for repayment of loans from eligible retirement plans. For a loan outstanding on or after March 27, 2020, any repayment amount due from that date to the end of the year may be delayed for up to one year.
Tax Effect: Rosen said, “For these loans, you can defer your payments for up to one year. Interest will continue to accrue on the balance and is not tax-deductible. This would not affect the taxpayer’s 2020 taxes.”
COVID-19 Tax Issues For Small Businesses
Paycheck Protection Program Loan Forgiveness
The Paycheck Protection Program (PPP) loan program is an SBA-supported loan program for businesses affected by the coronavirus.
Tax Effect: Rosen explained how the forgiveness of a PPP loan works: “When a PPP loan is forgiven, it does not have to be included in the business’s gross income for federal income tax purposes. These forgiven loans are also not counted as taxable income for federal income tax purposes. However, the expenses paid with the PPP proceeds are not allowed as a tax deduction for tax purposes.” She offered this situational example:
A business in 2020 has $100,000 of sales and received a PPP loan of $50,000 which was or will be forgiven. The taxable income for this company is $100,000, which excludes the $50,000 PPP loan since this is non-taxable. The same business spent $150,000 on business expenses but only $100,000 of expenses are tax-deductible since the expenses paid with PPP proceeds are not allowed a tax deduction. The net result for this business is $100,000 of taxable sales less $100,000 of deductible expenses, which is “tax-neutral” for the PPP loan.
The American Rescue Plan extended funding for this program and expanded it to include eligibility for digital media companies and nonprofits. The deadline for applications was extended to May 31, 2021.
Employee Retention Tax Credit
The Employee Retention Credit is a refundable tax credit for businesses that have had their operations partially suspended or had a significant decline in revenues due to COVID-19. Via the CARES Act, the tax credit was equal to 50% of qualified wages for employees per calendar quarter through Dec. 31, 2020. The maximum credit per employee was $5,000.
New legislation expanded and extended this credit to 70% of qualified wages through the end of 2021.
Your business can take the tax credit against your share of Social Security taxes as an employer by not withholding these taxes. You can claim the credit on your quarterly payroll tax report (Form 941).
Tax Effect: Any tax credit you receive isn’t included in your business’s gross income for federal income tax purposes, but you can’t deduct the amount of the tax credit as an expense for your 2020 business tax return.
You don’t have to take the Employee Retention Credit. Furthermore, if you elect not to claim the credit in one calendar quarter, you are not prohibited from claiming it in a subsequent calendar quarter.
Deferral of Tax Credits for Sick Leave and Family Leave Payments
The 2020 Families First Coronavirus Response Act (FFCRA) gave small businesses refundable tax credits to cover the cost of providing employees with required paid sick leave and expanded family medical leave due to COVID-19. The tax credits program ran from April 1, 2020, through December 31, 2020.
The American Rescue Plan Act extended these credits through Sept. 30, 2021.
You can receive the tax credits for payments you made to individuals for sick leave or family leave for coronavirus situations and also for costs to maintain health insurance for eligible employees. You can reclaim the credits through your quarterly employment tax return (Form 941).
Employers can spread out withholding for the deferred employee taxes throughout 2021 instead of just the first four months, as was previously announced.
These tax credits are also available to self-employed business owners who take sick leave and family leave for coronavirus-related reasons.
This tax credit program is complicated, with eligibility requirements and time limits. See this comprehensive article from the IRS with FAQs on the COVID-19-Related Tax Credits.
Tax Effect: Payments to employees under this program are taxable to them, and they are subject to withholding of FICA taxes (Social Security and Medicare) and federal income taxes.
The employer must include the full amount of the credits for qualified leave wages in its gross income for the year. Employer payments of qualified sick pay and family leave wages are deductible as business expenses. The proper amount deductible by the employer is the amount of federal employment taxes before reduction by the tax credits.
Deferral of Employer Portion of Social Security Tax
The CARES Act includes a provision that allows businesses to defer the employer portion of FICA taxes (Social Security and Medicare) during 2020. The deferred amounts may be deducted from required FICA tax payments. They must be reported on the quarterly wage and tax report (Form 941) and must be repaid, half by the end of 2021 and half by the end of 2022.
If you are self-employed, you can defer payment of 50% of the Social Security tax on your net earnings from self-employment for the period from March 27, 2020, to December 31, 2020. Then, you must repay the deferred amounts using the same schedule as employers. You can claim the credit on your 2020 tax return.
Tax Effect: CPA Rosen explained that a business that elects this deferral is entitled to a tax deduction for these taxes depending on which type of accounting system the company uses (cash or accrual):
- A business on an accrual basis is entitled to the deduction in the tax year the payment is due
- A business on a cash basis is entitled to the deferral in the tax year the payment is made
This deferral is coordinated with the credits for paid leave under the FFCRA and the employee retention credit under the CARES Act.
Trump Payroll Tax Deferral
On Aug. 8, 2020, a presidential memorandum was issued allowing employees to defer their part of Social Security tax for wages from Sept. 1, 2020, to Dec. 31, 2020. The deferral process allows the employer to deduct that amount of withholding in the first quarter of 2021 from the paychecks of employees who request this deferral.
Any employees who requested this deferral must repay by agreeing to the employer withholding the total amount between Jan. 1, 2021, and April 30, 2021. This will result in double withholding for these employees until the full amount is paid back. If the employee is no longer working for you or can’t otherwise make these payments, consult an attorney to find out your options.
Tax Effect: Employers will have to report the deferred amounts on Form 941 for the applicable quarter and work with the employees to take the additional withholding from their paychecks in 2021.
Because 2020 taxes can be layered and complex, and every individual tax situation is unique, get help from a tax professional before you make any tax decisions.