By: Pamela Martinez, JBS Corp
COVID-19 has ripped normalcy from beneath us and altered our life in every aspect; our work, social, and personal lives have been flipped upside down with no end in sight. To follow suit the 2020 tax season will be a mind-boggling one.
Collecting Unemployment
COVID-19 forced businesses across the country to turn their “Open” lights off and flip their door signs to “Close” with an unknown return date. As a result, approximately 30 million Americans are collecting unemployment benefits. Some are earning more on unemployment than usual, others making less, and all will see changes in their tax bills. Comparative to recent years, your 2020 tax bill is going to look different if you’ve collected unemployment during the pandemic. Unemployment benefits are considered taxable income. Changes to your income can result in changes to your tax bracket. For example, an individual earning a higher income than usual on unemployment, is subject to fall under a higher tax bracket, in turn paying more taxes. And vice versa. Also, for those individuals receiving unemployment benefits who opted out of having federal withholding taken out, you are liable for paying those taxes this coming tax season.
Business Loans
The U.S. Small Business Administration (SBA) and Treasury provided a few COVID relief funding options in efforts to help small businesses remain open and while also being able to pay their employees. Benefits such as the Paycheck Protection Program (PPP) Loan/Grant, gave small businesses loans of 2.5 times their average monthly payroll expenses. For example, if you’re a business owner and it cost you $10,000 a month to pay your staff, your loan amount would be $25,000. This loan also served as an incentive for small business owners to get their staff off of unemployment and back to work.
So, the government has given you this money… Now what? The PPP loan caught the attention of millions of small business owners because of what it offers: a two-year loan, with no payments for six months, a rare low-interest rate of 1%, and can be fully forgiven. Of course, That all depends on how well you follow the rules. The loan will only be forgiven if used for qualified expenses, including payroll cost, interest, rent, and utilities.
Nevertheless, the rules are tricky. All employees must be hired back at the same rate by a specific date, and then there are required-spending guidelines. Such as, 60% or more of the funds must be used for payroll expenses.
However, many who acquired the loan misinterpreted its terms. Once the PPP loan is forgiven, tax deductions cannot be made on those expenses funded by the loan. Meaning that your profit and loss statement for 2020 will not reflect the usual numbers you’ve seen in the past, and you will be responsible for paying the taxes on the PPP loan.
Payroll Tax
On August 8, 2020, President Trump signed a Payroll Tax Deferral Executive Order that enables employers to withhold Social Security payroll taxes from employees that earn a taxable income of less than $4,000 on a bi-weekly pay period. Countless employees are going to see a slight increase in their paychecks for the remainder of the year. However, beginning in January 2021, businesses will need to repay the deferred taxes, and those same employees are likely to experience significant pay cuts to do so.
President Trump’s payroll tax deferral offers Short-term benefits with long-term consequences. Many people are excited by not paying taxes and benefiting from the extra cash, but they fail to realize that this money will have to be paid. It’s essential for business owners who opt to use the payroll tax deferral to understand that this isn’t forgiveness, it’s deferral. And as of right now, that money is going to be due May 1, 2021. Payments made after this deadline are subject to interest, penalties, and additional taxes.
Home Office Deductions
Home office deductions are intended for independent contractors and self-employed individuals whose business operates out of their homes. Not for secondary office. In other words, if you’ve been working from home for the better part of quarantine and have purchased home office equipment to accommodate your work needs, unfortunately, you are not eligible to take a home office deduction. However, if you’re self-employed and have an established office outside of your home but had to operate from home due to the stay-at-home orders, you can claim home office deductions. The guidelines are deceitful, and claiming these deductions while ineligible can increase your audit risk.
Reach out to a tax professional if you’re concerned about your 2020 taxes. If not careful, millions of Americans will be paying more taxes than they ever have before.
