Changes, Changes, and More Changes!
By Kathi Koenig, CPA
2020 was certainly a year for changes in all areas of our life. As we start into 2021 and prepare to get our tax returns filed, there are several changes to the tax rules that you may need to know. One of the biggest changes came in December and was a big win for businesses that had received the Paycheck Protection Program (PPP) Loan during 2020. I have included a few of the win-win changes for businesses and individuals.
Deductibility of Expenses Paid with PPP Loans - The CARES Act was signed into law in March of 2020 and created the Paycheck Protection Program. This was a program to help businesses weather the effects of the Coronavirus, and keep employees paid even if the businesses were slowed/shut down and the employees were not needed full-time. If employers used the money to cover payroll and a few other specified expenses, the loan would be forgiven. When the program was created by Congress, it was clear that if the loan was forgiven after the business used the money according to the rules, the income would be tax exempt. After millions of dollars had been distributed to businesses through this program, the IRS issued a notice stating that the expenses that were reimbursed with PPP money would not be deductible for tax purposes and in essence, made the income taxable. Congress reached out to the Treasury saying that was not their intent, but the IRS reaffirmed that the deductions would not be allowed for tax purposes.
Fortunately, Congress passed the Consolidations Appropriations Bill signed on December 27th, stating that business expenses paid using forgiven PPP loan funds would be fully deductible to businesses. This was great news for taxpayers! There are still questions pending on how to handle this situation fully so be sure to visit with your CPA to determine how this will affect your tax situation.
Net Operating Loss Carrybacks- The CARES Act, signed into law in March of 2020, now allows taxpayers to carry any net operating losses incurred in 2018, 2019 and 2020 back for five years. Prior to the CARES Act, a business was only allowed to carry their losses forward and limited the amount that could be used to 80% of their taxable income. This change may enable taxpayers to get refunds of taxes paid in earlier years and help them to better navigate these difficult times.
Recovery Rebate Credit- The CARES Act also created an economic impact payment to taxpayers of $1,200 for single or $2,400 for married taxpayers, plus $500 for any qualifying child. The IRS used information from the taxpayer’s 2019 or 2018 return to determine eligibility. If the taxpayer did not file in those years or the return has changed, the taxpayer may not have received the payment or received an incorrect amount. In either case, the taxpayer will need to claim the credit. If the taxpayer received more than they would be eligible for based on 2020 information, they are not required to repay the extra they received. No credit is allowed to taxpayers who could be claimed as a dependent of another taxpayer, to nonresident aliens or to individuals without a valid Social Security number for employment in the United States. Be sure to let your tax preparer know what you received for the stimulus payment in 2020 so they can calculate the credit.
Charitable Contributions- Another change for 2020 is that taxpayers that do not itemize can now deduct up to $300 of charitable contributions on their tax return as well as take the standard deduction. Be sure to let your tax preparer know of your charitable contributions for 2020.
These are only a few of the changes for 2020, but hopefully they will help make your tax burden less and also remind us that changes can be good!
Kathi Koenig, CPA | Consultant and Former Shareholder