And A Few Things to Cheer About
Below are some of the changes to expect in your 2020 tax returns. Except for the increases in the standard deduction, all were the result of Federal legislation drafted and passed in 2020 designed to keep the economy afloat during the COVID pandemic. And all were favorable to us as taxpayers. Even in such a year as challenging as 2020, that’s a little something to cheer about.
Deductibility of Expenses Related to PPP Loans. Congress stepped in the latter part of December 2020 and corrected an oversight they made in the CARES Act. The CARES Act, signed into law on March 27, 2020, established the Paycheck Protection Program (“PPP”) to provide limited relief to small businesses during the COVID pandemic. The PPP provided forgivable SBA loans to qualifying businesses to cover payroll costs, including benefits, mortgage interest, rent, and utilities. Assuming the company complies with the eligibility criteria for forgiveness, the loan principal and accrued interest will be forgiven by the SBA. Additionally, under the CARES Act, this forgiveness will not result in taxable debt cancellation income or the loss of tax attributes.
This sounded good. However, later during the year, the IRS opined that all was not well. In their view, the payroll cost and other qualifying expenses that gave rise to PPP loan forgiveness were not deductible. The IRS reminded Congress that other areas of the tax code and regulations prohibited deductions (and other favorable tax attributes) for expenses related to non-taxable income. The CARES Act was silent regarding the deductibility of the qualifying expenses. The IRS effectively turned the non-taxability of PPP loan forgiveness upside down.
Congress corrected their prior legislative oversight in the Consolidated Appropriations Act, 2021 (“the Act”), signed into law on December 27, 2020. Under provisions of the Act, qualifying expenses related to PPP debt forgiveness are retroactively deductible.
Therefore, the original intent of Congress was satisfied. PPP loan forgiveness is not taxable income, and the qualifying expenses related to PPP are deductible. This is a much needed and sizable benefit to many closely held companies.
Recovery Rebate Credit. Congress passed two rounds of economic impact payments (a.k.a stimulus payments) in 2020 directed to individual taxpayers to help alleviate the financial impact of the COVID pandemic. The CARES Act provided for payments up to $1,200 per person. The Consolidated Appropriations Act provided the second round of payments up to $600 per person.
The payment amounts are intended to be based on adjusted gross income, filing status, and qualifying dependents as presented on your 2020 individual tax return. Of course, your 2020 Form 1040 will not be filed until sometime in 2021, as late as October 15. To get funds in the hands of the American people as quickly as possible, the IRS sent “advance payments” based on either your 2018 or 2019 tax returns. In other words, the IRS, for the sake of expediency, assumed your tax status (adjusted gross income, filing status, dependents, etc.) would be the same in 2020 as they were on either your 2018 or 2019 Form 1040.
However, your tax situation may have changed in 2020. For example, your income may have decreased, or the number of dependents may have increased. Therefore, you may need to true-up the amount you received. This true-up is reported on Line 30 of the 2020 Form 1040 and styled “Recovery rebate credit.” The IRS provides a worksheet in the Form 1040 instructions to calculate the additional amount of stimulus payment the IRS owes you.
The good news is that the true-up can only result in a larger stimulus payment in the form of a rebate credit. If the IRS’s original advance payments were, in fact, too much (because your situation improved in 2020), you are not required to pay it back.
Another bit of good news, the stimulus payment is not taxable.
Charitable Contributions. Last year, you could only deduct charitable contributions if you itemize deductions. However, the majority of Americans do not itemize but, instead, take the standard deduction. Therefore, most individual taxpayers received no tax benefit for their 2019 charitable contributions. However, the CARES Act and clarification by the recently passed Consolidated Appropriations Act, 2021 provides a small “above the line” benefit on your 2020 tax return for cash contributions to charities if you take the standard deduction. A deduction up to $300 ($600 for joint filers) is permitted on Line 10b of Form 1040.
Standard Deduction. As described above, most taxpayers take the standard deduction. The 2020 standard deduction for all filing statuses increased for 2020, as follows:
- Single: $12,400 ($200 increase)
- Married filing jointly and surviving spouse: $24,800 ($400 increase)
- Married filing separately: $12,400 ($200 increase)
- Head of household: $18,650 ($300 increase).
The 2020 additional standard deduction for those 65+ or blind remains unchanged:
- Single: $1,650
- Married filing jointly and surviving spouse: $1,300
- Head of household: $1,650
For those both 65+ and blind, the above amounts are doubled.
Many More Changes. The above is a summary of just a few of the changes for the 2020 tax year. There are many more that impact both your 2020 and 2021 tax returns. Please contact us for the details.