We are just about a month into the Biden administration and still waiting on a COVID stimulus plan that, hopefully, will be the last stimulus we need before we emerge from the pandemic back to a more normal economy.
In the meantime, many of us are getting ready to file income taxes for a year that was extraordinary in many respects.
In late spring last year, Congress passed the CARES Act, the key provision of which sent twelve-hundred-dollar stimulus checks to eligible individuals to help cover expenses as the financial crisis began to hit individuals and families.
Some folks never received their checks even though they were eligible. No worries. You can recover the missed stimulus check from spring and winter 2020 by claiming a “Recovery Rebate Credit” on your tax return.
Either way, the stimulus money that is payable to you is not taxable on this year’s tax return. So no need to worry about withholding from the stimulus money. It is yours free and clear.
For millions of workers, 2020 was the first year that many had to apply for unemployment benefits and deal with government payments. In addition to the state and federal unemployment benefits that were paid to workers affected by the pandemic, many workers also received benefits under the federal Pandemic Unemployment Assistance (PUA) program.
All of those unemployment benefits are going to be taxable when you file your tax return this year. They are taxable as income, but not as wages. That means that while you will have to pay state and federal income taxes on the money, you will not be responsible for Social Security or Medicare payments on the funds. It’s a small win, but a win nonetheless for employees.
But if you are a business owner who received pandemic assistance under the CARES Act through the PPP loan program, there is plenty of good news on the tax front.
The IRS has made clear that loan proceeds received under the PPP program are not taxable. That is true even if those proceeds were ultimately forgiven. That forgiveness pumped up the loan value by at least twenty percent.
But the government’s largesse did not end there. For those who were able to take advantage of the PPP program, proceeds were required to be used for payroll expenses and some other operational expenses.
Typically, those types of business expenses are deductible off total income for the year. In other words, any revenue that is used to pay those types of expenses is not taxable.
But the question that arose after the PPP program went into effect was whether or not employers would still be able to deduct the expenses covered by the PPP loan proceeds, given that the proceeds themselves were not taxable.
The IRS gave a big win to employers when it decided that not only would the loan proceeds not be taxable, but that the expenses that the proceeds were used to cover could still be written off against revenues. A true win-win for employers.
It is not clear why governmental policy would grant tax favorability to businesses, but not grant the same favorability to employees. After all, both have struggled during the pandemic, and it is arguable that commercial enterprises have greater financial wherewithal to weather the financial storm better than most individuals do.
Within the next several weeks we can expect another round of stimulus and loan programs to be approved. In the meantime, you can start filing your taxes now.