The coronavirus pandemic has resulted in new legislation and few changes to other laws due to the coronavirus-related stimulus efforts. If you’ve taken advantage of any of these stimulus programs, they may affect your 2020 individual tax return, business tax return, or even both.
Most of the tax changes come from the CARES (Coronavirus Aid Relief and Economic Security) Act and the FFCRA ( Families First Coronavirus Response Act).
Covid-19 Legislation‘s Impact on Individual Taxes
Your stimulus payment
The economic impact payment you may have received this year is a refundable tax credit. You won’t have to include it in your taxable income on your 2020 federal tax return. The law also doesn’t need you to pay back any stimulus payments you may have received even if you don’t qualify. Ensure that you keep the notice you received with your tax records.
Many CARES Act provisions have also made extra funds available from retirement plans, leading to a few tax consequences.
Required Minimum Distribution Waivers (RMDs)
Older people must take a minimum distribution from their IRA or any retirement plans, but the requirement has been waived this year, including beneficiaries of inherited accounts. Taxpayers who took distributions at the beginning of 2020 have been allowed to return the funds to their retirement accounts. However, you must return the funds before August 21, 2020.
If you didn’t take the RMD or returned it on time and correctly, usually through your broker, it wouldn’t be included in your taxable income for 2020. If you didn’t give back the RMD, the amount, including any tax withheld, is taxable in 2020 since it will be considered a distribution from an IRA. However, the positive thing is that the withholding tax is paid in and can be applied to your 2020 taxes.
Retirement plan or IRA distributions
If you’re taking an early withdrawal of funds or may have taken from your employer’s retirement plan, IRA, or 401(k) between January 1, 2020, and December 31, 2020, for any coronavirus-related reasons, you can withdraw up to $100,000 from these funds without paying the additional 10% tax on early tax distributions.
The tax effect of this is that you may have to pay the distribution over the next three years, which means that you must include the entire distribution in your income tax for every year that you repay. You can also choose to have the whole distribution in your income for the year 2020, which will increase your taxes. You can check with your tax advisor from http://www.taxfyle.com/ for the details on when these payments must be made.
Retirement plan loan relief
Another CARES Act provision allows for an additional year for the repayment of loans from qualified retirement plans. Outstanding loans from March 27, 2020, and any repayment due from this date to December 31, 2020, can be delayed for up to one year.
This provision’s tax effect is that you can defer your payments for up to one year for such loans. The interest will continue to increase on balance and isn’t tax-deductible. This won’t affect your taxes for 2020.
COVID-19 Legislation’s Impact on Small Business Taxes
Paycheck Protection Program loan forgiveness (PPP)
The Paycheck Protection Program is an SBA-supported loan program for small businesses affected by the COVID-19 pandemic. If you received a PPP loan, you might still be able to apply for forgiveness if you apply within the ten months of the covered period.
The tax effect of how the forgiveness works is that you don’t have to include it in the gross business income for federal law tax purposes when a PPP loan is forgiven. However, the expenses that were paid with the PPP proceeds aren’t eligible for tax reduction.
Employee retention tax credit
The employee retention cash credit is a refundable tax credit for businesses that had their operations partially suspended, or had a decline in revenues due to the coronavirus pandemic. The tax credit is equivalent to 50% of employees’ eligible wages per calendar quarter up to $ 10,000, which means maximum credit per employee would be $5000. You can take the shared credit against your share of social security taxes as an employer by not withholding these taxes. You can also claim the credit on your quarterly payroll tax report on Form 941.
The tax effect of any credit you receive is that you won’t have to include it in your gross income for federal income tax purposes, but you can’t deduct the amount of tax credit as an expense for your 2020 business tax return.
It’s not a must to take the Employee Retention Credit, and if you choose not to claim the credit in one calendar year, you’re not stopped from claiming it in the subsequent calendar quarter.
Deferral of the tax credit for sick leave and family leave payments
The FFCRA allows small businesses to receive refundable tax credits to cover the cost of providing their employees with the required paid sick leave and expanded family leave due to coronavirus. The tax credits program is from April 1, 2020 to December 31, 2020.
The tax credits can also be given for payments you made to an individual for sick leave or family leave due to COVID-19 situations, and even the costs of maintaining health insurance for eligible employees. The tax credits are available to self-employed business owners who take family leave and sick leave due to COVID-19.
The tax effect of this is that the payments to employees are taxable to them, and they are subject to withholding FICA taxes (Social Security and Medicare) and federal income taxes. You must include the full amount of the credits for qualified leave wages in your gross income for the year. Employer payments of eligible family leave wages and sick pay is deductible as business expenses. The employer’s right amount deductible is the amount of federal employment taxes before reduction by the tax credits.
The tax returns for 2020 can be tricky. Ensure you get help from a tax professional.