Coronavirus Impact on 2020 Taxes
Coronavirus Impact on 2020 Taxes
The Coronavirus has had wide-spread financial impact. We all know by now that there was an extension of the 2019 income tax filing deadline, which is coming up soon on July 15th. If you haven’t filed your 2019 taxes yet, please contact our office for assistance as soon as possible. It may also be a good idea for you to understand now how your 2020 taxes may be affected in April. Some of the common financial impacts affecting 2020 income taxes include business losses, business interest expenses, increased medical leave, widespread unemployment, early withdrawals from retirement, and drastic increases in working from home. The CARES Act and Family First Coronavirus Response Act (FFCRA) included several tax relief provisions you should know about, and there are provisions under the previously existing laws that may apply to more taxpayers due to the changing circumstances caused by the Coronavirus. You may also be wondering how your coronavirus stimulant payment will be handled when 2020 taxes roll around next April. Here is some guidance on how those issues could impact your 2020 income taxes, and what records you should be keeping right now.
Many businesses are struggling to stay afloat during this challenging time. You can deduct business expenses from income, but what about when the expenses going out are more than the income coming in? That is called a Net Operating Loss (NOL), and in years past corporations had the ability to amend old tax returns to carry excess losses back for two years and deduct them against past income and to carry them forward up to 20 years to deduct from future years’ income. The Tax Cuts and Jobs Act eliminated the ability to carry back a NOL and limited the amount of income it could be carried forward to offset. The CARES Act temporarily allows NOLs to be carried back to offset income for the past five (5) tax years and carried forward into 2020 without any percentage limitation.
Business Interest Expenses
Many businesses have been forced to borrow money to cover basic expenses and stay afloat. That means they not only have to find the funds to pay back those loans in the future, but they are also incurring additional expense in the form of interest. The CARES Act provided tax relief to businesses that are dealing with this additional interest expense, in that it increased the amount of interest that can be deducted. Previously the Tax Cuts and Jobs Act limited business interest deductions to 30% of the business’s adjusted taxable income. The CARES Act increased the limitation to 50% of adjusted taxable income.
Increased Medical Leave
The Families First Coronavirus Response Act (FFCRA) expanded the Family and Medical Leave Act of 1993 (FMLA) to require paid leave resulting from the Coronavirus and provides a tax credit to employers who pay leave under this mandate. Additionally, any wages paid under the FMLA expansion are not subject to the employer portion of Social Security Tax, Railroad Retirement Tax Act. Self-employed individuals whose situations are such that they would have qualified for the FMLA mandate had they been employees can claim a credit based on their daily average self-employment income.
The number of individuals receiving Unemployment Compensation has skyrocketed due to the Coronavirus business closures. If you are receiving Unemployment Compensation, you should understand what taxes apply to it. Unemployment Compensation is not subject to FICA taxes, including Medicare and Social Security, and it is not taxable income for the Commonwealth of Pennsylvania. However, Unemployment Compensation is subject to Federal Income Tax. You can expect to receive a Form 1099-G reporting this as income, and you will be required to report it on your Federal Personal Income Tax Return.
Early Withdrawals from Retirement
Under typical circumstances, you would pay two different taxes on an early withdrawal from retirement. First you would pay income tax on the money you withdraw, assuming it is from an account such as a 401(k) or traditional IRA that was funded with pre-tax dollars. On top of that, you would have to pay a 10% penalty tax on the early withdrawal. Provisions in the CARES act waived the 10% early withdrawal penalty, so the tax burden of withdrawing funds from retirement is less. You do still have to pay income tax on a withdrawal from retirement, though, and the CARES Act also waived some of the withholding requirement, which means you are more likely to owe money at tax time if you take an early withdrawal from retirement. Make sure you are prepared for that by April of 2021.
The number of people working from home dramatically increased during the Coronavirus crisis, which means many taxpayers should consider whether they may be able to claim a home office. The rules for claiming a home office did not change, but they are likely to apply to more people. A home office deduction is allowed if you are self-employed or operating a business in which you are an owner, and you use a portion of your home exclusively for business purposes on a regular basis. If you are one of the many people who set up a home business, such as making and selling face masks, during Coronavirus, you should consider whether your work space qualifies as a home office.
An employee cannot claim a home office deduction unless the Convenience of Employer test is met. The employee’s home office is deemed to be for the employer’s convenience if it is a condition of employment, necessary for the employer’s business to properly function, or needed to allow the employee to properly perform his or her duties. In past years, it was rare for that test to be met, as it was typically a convenience to the employee to have the option to work from home. During Coronavirus shutdowns and stay at home orders, though, employee use of home offices was necessary for businesses to continue to function.
To claim the home office deduction, there are some records you will need to keep, and you should gather them now while your memory is fresh. First, you need to know the portion of the year you met the qualifications for the home office deduction. If you started a new home business, what date did you start? If you are an employee, at what date was your employer’s office forced to shut down and at what date were they allowed to reopen? Make records, and save copies of applicable governor’s orders, news stories, and emails that may identify when you were required to work from home and when you were to report to work again. Second, you need to know what percentage of your household was used for your home office. Take pictures of the office space as a record of your use of the space in case you decide to convert it to a different space in the future. Measure the area that you used exclusively as a home office. This applies even if it was not the whole room. Measure the portion of the room that was used exclusively as a home office. You also need to measure the square footage of the entire house or living space, so you can determine what portion was used for your home office. Finally, you should keep records of any actual expenses that could be deductible. This includes rent or mortgage payments, utilities, repairs, security system, telephone, and insurance. There is an alternative simplified method based on standardized figures, but your tax preparer should ideally have the ability to look at your actual expenses and determine which method is most effective for you.
Most Americans received a stimulus payment in April or May of 2020 in an amount around $1,200 per taxpayer, but variable based on their income and dependents. This was provided for as a recovery rebate under the CARES Act. The payment is not taxable income. However, it is an advance payment of a credit that you would claim and receive on your 2020 income tax return. That means you must file your 2020 income tax return, which will determine whether your actual eligibility for the credit matches the amount of the credit you received. If you are not eligible for the full amount of the credit you received as your stimulus payment, you may be required to pay back the excess with your 2020 income taxes. Historically other tax credits that can be received as advance payments, such as the premium tax credit, were required to be paid back with interest if they were received improperly. The CARES Act provides that there will not be a requirement to pay interest on an overpayment of the recovery rebate.
If you have questions about your 2020 income taxes, or if you need assistance filing your 2019 income taxes before the extended deadline of July 15, 2020, please contact our office at 717-657-7770.