What Businesses and Individuals Should Know for the 2020-2021 Tax Season
March 29, 2021 by Gordon Advisors
Tax impact of PPP loans, stimulus checks, employee retention credits and more
The 2021 tax season for year 2020 may be one of the most complicated and fluid tax seasons yet. With Paycheck Protection Program (PPP) loans, the Consolidated Appropriations Act (stimulus checks), and changes to disaster relief provisions and employee retention credits, tax preparers, businesses and individuals are doing their best to keep up. The government funding bills signed by former President Trump in December 2019 included a lot of tax provisions.
Below are just a few of the provisions individuals and businesses should consider when preparing their 2020 year-end taxes. This list is not exhaustive and does not fully encompass all of the possibilities. Individuals and businesses should work with certified public accountants, like Gordon Advisors, to determine their unique 2020 tax situation.
Tax Changes for Individuals
The year 2020 tax deadline was extended 30 days.
The deadline to submit your 2020 tax return and pay your tax bill has been pushed back a month to May 17, 2021. This did not extend the 1st quarter estimated tax payments, which are still due 4/15.
For some, tax refunds may be delayed and lower.
The average refund issued so far this year is $2,880, a 7.8% decline from the 2020 average of $3,125.
Stimulus check payments are non-taxable.
For most, the combined total of stimulus check payments will equal the tax credit allowed. In that case, the credit will be reduced to zero. However, if stimulus checks were less than credit amount, the tax you owe will be reduced by the difference (and you might receive a refund). And if the combined total of your stimulus checks was more than your credit amount, you generally won’t have to repay the difference to the IRS. Read more.
Liens and levies are no longer on hold.
The IRS temporarily suspended issuing new automatic, systemic liens and levies. This provision expired July 15, 2020.
Some installment payments can no longer be skipped.
The IRS temporarily allowed people with installment agreements to skip payments, but that provision expired on July 15, 2020.
Required minimum distributions (RMDs) impact retirement plan withdrawals.
Under the SECURE Act, the beginning age for taking RMDs rises from 70½ to 72, and many inherited IRA accounts must be completely withdrawn within 10 years of the death of the IRA owner or 401(k) participant. The CARES Act allows seniors to skip their RMDs in 2020 without penalty. Additionally, there are new retirement account tax breaks. Retirement and IRA dollar limits are also higher in many cases. Read our blog, IRS Provides RMD Relief for 2020., to find out more about RMDs.
Standard tax deductions increased.
Many of the standard deduction amounts were increased for 2020. Married couples get $24,800, plus $1,300 for each 65+ year-old spouse. Singles can claim a $12,400 standard deduction or $14,050 ages 65+. Head-of-household filers get $18,650 for their standard deduction, plus an additional $1,650 at age 65.
Capital gains income thresholds to qualify increased.
The 0% rate applies to individual taxpayers with taxable income up to $40,000 on single returns, $53,600 for head-of-household filers and $80,000 for joint returns.
Estate and gift taxes increased.
Estate and gift tax exemption for 2020 increased $11.4 million to $11.58 million. Read our blog, Lower Business Values Strengthen the Case for Gifting.
New disaster relief payments are tax-free.
Tax-free payments include reimbursements or direct payments for reasonable and necessary personal, living or funeral expenses incurred as a result of a qualified disaster or to repair or rehabilitate a personal residence, or repair or replace its contents, on account of a qualified disaster.
Changes for Businesses
Partnerships and S corporations may request a six-month extension.
With an extension, the annual tax return will be due on September 15. The deadline remains April 15 for C-corporations and trust returns. The extension does not apply to first quarter estimates due April 15th.
Teacher deductions now include personal protective equipment (PPE).
Teachers and other educators can now deduct out-of-pocket expenses for COVID-19 protective items on their tax return. Subject to limits.
Employee Retention Credits (ERC) changes: Broadened eligibility for ERC; those who previously did not qualify may now retroactively claim the ERC for 2020. The ERC credit amount increased in 2021. ERCs can be claimed with a PPP loan in 2021.
Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan. Group health care expenses are considered qualified wages even when no other wages are paid to the employee. The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter. Businesses with fully or partially suspended operations or businesses with at least a 20% gross receipt drop during certain time periods are eligible. Up to 70% of wages qualify for the credit including the cost to provide health benefits with a maximum credit of $7,000 per employee per quarter.
Noncorporate taxpayers may be subject to excess business loss limitations.
The at-risk limits and the passive activity limits are applied before calculating the amount of any excess business loss. An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus $250,000 (or $500,000 in the case of a joint return). Read more from the IRS.
Most taxpayers no longer have the option to carryback a net operating loss (NOL).
For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward.
Economic injury disaster loan (EIDL) advances (grant) no longer count against loan forgiveness.
This can help increase your forgiveness amount.
Updated eligibility requirements for second-draw PPP loans.
Businesses must have 300 or fewer employees, have used or will use the full amount of their first PPP loan on or before the second loan disbursement and have had at least 25% reduction in revenue for all or part of 2020 compared to the same time in 2019. Read our blog, Key COVID-19-Related Funding Updates for Contractors.
Meal and entertainment expenses can be deducted again.
Under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer – or an employee of the taxpayer – is present and the food or beverages are not considered lavish or extravagant.
Employers can defer employment tax.
The CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes.
Getting Help With Your Taxes
Navigating taxes can be difficult, especially for the 2020 calendar year. The experts at Gordon Advisors can help individuals and businesses take full advantage of new 2020 tax provisions and help you understand how these may impact your individual and or your business returns.
Additionally, please take a look at our Resource Center for COVID-19 which includes various helpful documents for navigating COVID-19 provisions. Contact Gordon Advisors today for assistance navigating the new tax laws.