Since the deadly COVID-19 virus has rocked our nation, there have been lots of changes and adjustments. New laws related to Coronavirus stimulus efforts have been implemented, and old laws have also been altered. Consequently, as a business owner or individual, once you have benefitted from any of these stimulus programs, your tax returns filing may be affected. Let’s have a closer look at the covid-19 tax effect on this tax season.
Certain tax changes came about from relief programs such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Families First Coronavirus Response Act (FFCRA).
COVID Tax Issues For Small Businesses
Paycheck Protection Program Loan Forgiveness
The Paycheck Protection Program (PPP) loan program, established by the Small Business Association, is a loan that helps businesses keep their workforce employed during the Coronavirus (COVID-19) crisis.
After the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020, the Small Business Administration (SBA) issued guidance that changed several times. Then the rules around PPP and taxes changed again recently (in December 2020) with the passage of the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) of 2021.
The CARES Act explicitly provides that loans forgiven under the PPP are not subject to taxation, (as a discharge of indebtedness income as they shall be excluded from gross income).
How Does PPP Loan Forgiveness Work?
After the passage of the CRRSAA into law in December 2020, Congress made clear that a forgiven PPP loan is completely tax-exempt and is not taxable income. When a business receives PPP loan forgiveness, it is exempted from including it in the business’s gross income for federal income tax purposes. This means that these forgiven loans are not counted as taxable income for federal income tax purposes. This new provision also allowed for PPP funds used for expenses written off like everyday business expenses as well.
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.
The new law significantly expands the employee retention tax credit beginning on January 1, 2021. The credit expires on June 30, 2021. The prior credit was 50% on $10,000 in qualified wages for the whole year (or a maximum of $5,000 per employee). The new credit is 70% on $10,000 in wages per quarter (or a maximum $14,000 per employee through June 30th).
The new law also expands which employers are eligible. Prior to the new law, the employee retention tax credit applied only to an employer who experienced a decline in gross receipts of more than 50% in a quarter compared to the same quarter in 2019. Eligibility is now expanded to include employers who experienced a decline of more than 20%.
In addition, the employee cap under which it is easier to claim the tax credit has been raised to 500 employees from 100 employees. Now, employers with 500 or fewer employees can claim the credit for wages to paid to employees irrespective of whether the employee is providing services.
Employers can now also receive both the Employee Retention Tax Credit and a PPP loan, just not to cover the same payroll expenses. Bear in mind, 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.
COVID-19 Tax Filing 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.
Remember: This is a refundable tax credit. See the Chamber’s original Guide to the ERTC for more information.
Deferral of Tax Credits for Sick Leave and Family Leave Payments
The 2020 Families First Coronavirus Response Act (FFCRA) gives 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.
These tax credits can be claimed for payments made to individuals who applied for sick leave or family leave in coronavirus cases. This also includes the costs to maintain health insurance for eligible employees. Like small business owners, self-employed business owners can also claim these credits if they have taken sick leave and family leave for coronavirus-related reasons. These tax credits can be reclaimed through your quarterly employment tax return (Form 941).
See this comprehensive article from the IRS with FAQs on the COVID-19-Related Tax Credits.
COVID-19 Tax Filing Effect: Wages are generally compensated for services subject to income tax under section 61 of the Code and federal income tax withholding under section 3402 of the Code unless an exception applies. The FFCRA did not include an exception for qualified leave wages from income. This means, payments to employees under this program are taxable to them.
It is the employer’s duty to include the full amount of the credits for qualified leave wages to the gross income for the year. These payments of qualified sick pay and family leave wages are deductible as business expenses.
Read more about Special Issues for Employees (including self-employed business owners).
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.
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.
COVID-19 Tax Filing Effect: Any 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
They must be reported on the quarterly wage and tax report (Form 941) and must be repaid, half by the end of 2021 and the other half by the end of 2022.
Employers are allowed to defer payroll taxes (as specified in the CARES Act) from March 27, 2020, through December 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.
The PPP Flexibility Act, which was enacted on June 5, 2020, changed the rules so employers can still defer these taxes even after a PPP loan is forgiven. Fifty percent of the deferred taxes that accumulated in 2020 must be paid by December 31, 2021, and 50% of the deferred amount must be paid by December 31, 2022.
Any employees who requested this deferral must repay by agreeing to the employer withholding the total amount between January 1, 2021 and April 30, 2021. This will result in double withholding for these employees until the full amount is paid back.
If for any reason you can’t make these payments or the individual no longer works for you, seek legal counsel to find out the available options.
COVID-19 Tax Filing 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.
COVID-19-Related Tax Issues for Individuals
If you received economic impact payment 2020, you qualify for a refundable tax credit. This payment doesn’t have to be included as a 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. Let’s look closer at these payments and their impacts.
Required Minimum Distribution (RMD) Waivers
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, 2020.3
Covid-19 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 2020.3 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.
COVID-19 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.
COVID-19 Tax Effect: Payments for these loans can be deferred for up to a year. Interest will continue to accrue on the balance but it will not be tax-deductible. This, however, would not affect the taxpayer’s 2020 taxes
Here are four questions to get you ready for your end-of-year meeting with your tax professional.
What should I do or think about to prepare for our meeting? Maintain solid bookkeeping and be sure to document your use of any PPP funding. It’ll make things easier for your CPA or bookkeeper.
What are some common mistakes small business owners typically make in preparing their taxes? This isn’t the year to go it alone. Know some of the key stumbling blocks for entrepreneurs.
Which tax changes over the last year might impact my business? The CARES Act rolled out emergency funding for small firms, and it will affect your tax return.
What are the typical deductions and credits for a business like mine that may apply to me? The write-offs and refundable claims you can make are going to be based on the specifics of your firm.
We know that this can all become overwhelming, but we advise you to seek the advice of a professional if you are unsure of anything while filing your taxes. Feel free to connect with us if you need any type of assistance with tax filing. We are a full-service virtual bookkeeping company and we’re happy to assist.
This article is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bookkeeping Confidential assumes no liability for actions taken in reliance upon the information contained herein.