Coronavirus has certainly made its mark on business, so it’s no surprise that income taxes coming due April 15 will have some new wrinkles. Many of these involve loans or other financial support related to individuals or businesses hurt by the pandemic.
Michael Schneider and David Campos of ATBS, the nation’s largest financial services provider for owner-operator truckers, as well as a few other experts, offer the following insights on COVID-19-related tax matters.
PPP LOANS. Questions still remain over conversion of Paycheck Protection Program loans to grants and how that’s counted as income. One sticking point is that while Congress designated PPP loans as tax-free and not to be considered as income, the IRS has a rebuttal: The tax code says if ordinarily deductible business expenses were purchased with tax-free money, those expenses are not deductible. Missing out on the deductions means higher taxable income.
Pending legislation in the Senate (S.3612) and the House (H.R.6821) would resolve the issue. The measures “will ensure the receipt and forgiveness of PPP assistance does not result in an unexpected and burdensome tax cost,” says a statement from the American Institute of CPAs (AICPA).
For now, there’s not much for PPP recipients to do before year-end other than what, ideally, they’ve been doing all along: keeping good records of how PPP money was spent, especially with respect to payroll. It might well affect not only your tax bill, but whether you pay back your loan with interest or whether you can keep the money and run.
ATBS President Todd Amen said most client loans ATBS has assisted with were between $8,000 and $12,000.
PPP AND OBAMACARE. This gets complicated due to the “unexpected colliding” of PPP and ACA, Schneider said. During open enrollment each year, Affordable Care Act applicants are asked to estimate their income for the coming year. A year ago there was no idea that COVID would initially hamstring the economy or that PPP money would be issued as a result.
As explained above regarding the tax treatment of PPP funds, “if your PPP forgiveness results in an effective increase of your net income, then you may have earned more than expected, potentially disqualifying you from a federal health insurance subsidy and resulting in repaying of some or all of your subsidy,” he said.
However, this could change if the legislation endorsed by AICPA is passed.
Less than 20% of ATBS clients have stayed with ACA coverage since the mandate to carry health insurance was revoked. For low-income taxpayers, it can still be a good source for a plan with discounted premiums.
BORROWING FROM RETIREMENT FUND TO COVER PANDEMIC LOSSES. “For those impacted by the pandemic who need liquidity, there is a special opportunity expiring at the end of the year,” said Mark J. Alaimo, an accountant active with AICPA. The opportunity through Dec. 31 is to borrow up to $100,000 from certain types of retirement accounts, such as a 401(k) or individual retirement account, and not pay the typical early withdrawal penalty of 10%. The loan becomes taxable income beginning in 2020, but the tax can be spread over three years.
Repayment isn’t mandatory, but if it’s done within three years, the loan can be treated as non-taxable. To get a refund, the taxpayer would have to file amended returns for any years where it was taxed, Schneider said.
“This potential liquidity lifeline should be used very cautiously to avoid setting back your retirement savings for years,” Alaimo said.
MISSING STIMULUS MONEY. If for some reason – you didn’t qualify, or your current address wasn’t on file, etc. – you didn’t get the pandemic stimulus check of $1,200, you can claim that as a credit on your tax filing. Likewise, if you had a child born during 2020, you can claim a $500 credit on your 2020 return.
PAYMENT FOR BEING COVID-SIDELINED. The intent is to pay self-employed workers for time they were put out of work due to COVID. Likewise, to pay self-employed parents for their time missing work to care for children who missed school or child care due to school and child care closures or COVID infection.
The rates are $511/day for adults, up to 10 days ($5,110 cap). For children, $200/day up to 60 days ($12,000). IRS instruction on this point, including documentation of missed work and school, remains vague, Schneider said, and the agency will likely issue more guidance. Owner-operators should save any documentation they have.
QUARTERLY TAX PAYMENTS. Because of early concerns about the pandemic’s effect on the economy, the IRS delayed the April 15 and June 15 deadlines for estimated quarterly tax payments to July 15. Some owner-ops who didn’t catch up by July might be behind on their payments for 2020. If you’re one of them, get caught up with your next Jan. 15 payment to avoid an April 15 surprise of interest payments and a bigger tax bill.
Next in this series: A volatile 2020 puts the spotlight on year-end tax choices regarding the timing of expenditures and depreciation.