We can all agree that 2020 was a year like no other in every aspect. A lot of business owners have faced financial issues because of widespread lockdowns. Taxes are no exception. So, what are the tax impacts of 2020 on this year’s filing?
This post is meant to help clear out some of the confusion caused by 2020 when it comes to taxes. I discussed everything in the video above but here are some of the most important points for your reference:
- Stimulus checks are NOT taxable income.
- Recovery Rebate Credit allows you to claim missing economic impact payments.
- Unemployment income is taxable.
- Many states do not withhold taxes automatically so you may owe.
- Check your Form 1099-G.
Paycheck Protection Program
- Loan forgiveness is NOT taxable income.
- You can deduct eligible expenses (rent, utilities, payroll).
Economic Injury Disaster Loan (EIDL) & Advance
- The EIDL Advance (up to $10k) is NOT taxable income.
- The EIDL loan is not taxable income because there is no loan forgiveness.
- Expenses paid for with EIDL loan funds are tax-deductible under the regular rules.
- No early withdrawal penalties on retirement and savings plans (401(k) and IRA).
- Withdrawals count as taxable income.
- Get a refund on taxes paid if you return the funds within 3 years.
Home Office Deduction
- Only self-employed people can take the home office deduction.
- Must be a “dedicated” workspace used solely for your business.
- Generally, you can’t deduct charitable contributions if you take the standard deduction.
- For 2020, you can deduct up to $300 total in cash contributions to qualified non-profit organizations.
- Extended through 2021 and deduction was doubled to $600 for married-filing-joint.
Working Out of State
- If you worked remotely in a different state for more than 183 days (about 6 months) you will likely have to pay taxes to that state, as well as to your home location.
- Many states have reciprocal agreements to avoid double taxation.
Payroll Tax Deferral
- Delay the employer portion of your federal payroll tax payments over the next two years.
Employee Retention Tax Credit (ERTC)
- Available if your operations were fully or partially suspended due to COVID-19 and you continued to pay your employees.
- Moreover, credit is 50% of up to $10k in qualifying wages for each full-time employee.
Paid Sick Leave Credit
- Families First Coronavirus Response Act (FFCRA) required many businesses to provide paid sick leave to employees who were absent for coronavirus-related reasons between March 31, 2020 and December 31, 2020.
- Can also take the credit for voluntary COVID-related sick leave provided between January 1, 2021 and March 31, 2021.
- Credit is also 100% of the cost of the sick pay.
- Report qualified wages for the credit on Form 941.
Paid Sick Leave Credit for Self-Employed Individuals
- Refundable Credit: Firstly, 100% of your qualified sick leave equivalent amount (based on your sick days) and secondly, self-employment tax based on a qualified family leave equivalent amount.
- “Equivalent amount” must be reduced if you also work as an employee and receive wages by an employer who claims credits under FFCRA.
- Claim the credit on Form 7202.
Learning about the tax impacts of 2020 will certainly help you face the coming tax season with more awareness. Meanwhile, it’s also important that you get ahead on prepping the necessary tax documentation. The earlier you prepare, the less stress you will have come tax time. You can check out IRS’s website further if you need more information!