What you need to know about the tax implications of government assistance
Q. What else do I need to know about taxes and stimulus checks?
A. If you didn’t receive the full amount because your income was too high (or you didn’t receive anything because it was too high), you may be eligible for a recovery refund credit on your tax return 2020 which means money in your pocket. This is because the stimulus checks sent out last year were based on your adjusted gross income for 2019, while the recovery repayment credit is based on your adjusted gross income for 2020.
If your income has decreased significantly in 2020 (possibly due to the pandemic), you may qualify for a tax cut that reflects the drop in your income. Remember that the government has linked the amount received by taxpayers to the income level. Below a certain level, you have the full amount; above a certain level you have nothing; and between the two, a progressive approach.
Besides the decrease in income, keep in mind a few other changes from year to year that almost always reduce taxes payable: you had a child; You got married; or you were declared as a dependent in 2019 but not in 2020.
Q. I received Unemployment Insurance benefits in 2020. Are they taxable?
A. Yes, unemployment benefits are considered taxable income by the federal and state governments. And it doesn’t matter if the benefit was funded by the federal or state government. (However, unemployment benefits are not subject to social security or health insurance taxes.) The state, which administers the benefits, offers an option of withholding tax on weekly benefits. If you did not opt for withholding tax, you could now be liable for a large lump sum in taxes owed.
Q. My business received a loan from the Federal Paycheck Protection Program. Is it taxable?
A. First of all, remember that PPP loans are 100 percent repayable. Beneficiaries do not need to repay the principle or interest, as long as they follow guidelines, such as paying workers at their usual pre-pandemic rates. As such, PPP loans look like grants, which are generally taxable. And under the usual circumstances, canceled debts of this type are taxable.
But not in this case. Your PPP loan is not taxable. This has been firmly established since day one, when Congress passed the $ 2.2 trillion CARES Act and President Trump signed it into law in March. (Companies that have used PPP money for unauthorized purposes are supposed to be denied forgiveness on loans and must repay them with interest.)
The goal of the program was to keep businesses affected by the pandemic open and able to pay their workers. However, since March, the government has changed some basic rules, which may affect your tax liability.
Q. What are the rules and how have they changed?
A. A rule of thumb is how much of the loan money must be paid out of payroll to be eligible for a rebate. Originally, at least 75 percent was to be used to pay workers, with the remaining amount going for overhead costs, such as rent, mortgage interest, utilities and personal protective equipment. This was later revised to require at least 60 percent for workers’ wages.
Q. What are the rules for business owners who deduct overhead costs as a business expense?
A. Originally, the government said businesses could not deduct expenses such as rent and mortgage interest if those expenses were paid with reimbursable PPP dollars. This was considered by some to be a “double soak”. But last month, when the last stimulus bill came into law, Congress changed the rules so that business expenses paid with P3 funds can be written off as business expenses. It gives a boost to small businesses, many of which are struggling.
Q. What if I haven’t requested cancellation of my PPP loan by the end of 2020?
A. The loan amount remains tax free, pending approval. Commercial borrowers have up to 10 months after spending the loan proceeds to request a rebate.
Q. What about sole proprietorships, independent contractors and self-employed workers?
A. The same rules for PPP loans apply to them as to other small businesses. And associations too.
Q. What is the Employee Retention Tax Credit?
A. This is another federal program designed to encourage employers to keep their employees on the payroll by offering a refundable tax credit. For 2020, the maximum credit is $ 5,000 per employee, but Congress recently extended it to $ 14,000 per employee until June 30, 2021. But businesses cannot claim a retention tax credit. employees for wages paid with PPP money.