“It’s going to be a tough tax year; it’s going to be brutal.”
That’s CPA Robin L. Rosenbaum’s assessment of what many small businesses or individuals may find when they try to fill out 2020 tax forms.
Rosenbaum, vice president/treasurer for JMR Financial Group in Superior, fears the financial aids intended to lighten the economic burden of 2020 may end up causing frustrations and financial detriments come tax time.
From beefed-up unemployment checks to the federal financial lifelines for businesses, there are potentially hidden tax pitfalls. It’s best to be aware of and plan for them now, she and other area accounting experts warn. The issues arise when taxes have been withheld, when they haven’t and how that extra money needs to be ultimately claimed.
“If you had anything to do with extra unemployment or extra grants or any of the loans … it’s going to be complicated,” Rosenbaum said.
Ryan Sather of Esterbrooks Scott Signorelli Peterson Smithson, Ltd. in Duluth, wonders, though, if the upcoming tax season would be worse than what happened earlier this year – which was a bad one for those doing taxes.
“COVID really made tax season a challenge,” he noted. “Trying to do business with a lockdown order, no client meetings where we routinely have lots of client interaction, staff working from home, safety concerns regarding staff in the office, dealing with the CARES act and stimulus packages while trying to push through tax season, last minute changes in due dates of returns and tax payments, uncertainty in the economy, it was a hectic tax season.”
Unemployment, tax holidays, stimulus
For those who received unemployment compensation for some or all of 2020 – and especially those who benefited from the extra $600 in federal CARES money – the potential “gotchas” stem from tax withholdings and total income.
Unemployment compensation is counted as income for both federal and state taxes, but unless recipients request it, no income tax is withheld.
For Wisconsin, according to the unemployment office, you can request to have taxes withheld or to change your current withholding status by going online at my.unemployment.wisconsin.gov. You can request taxes withheld from your benefit payments or make estimated tax payments.
In Minnesota, you can change your amount of withholding by logging into your account at www.uimn.org or calling the automated phone system.
Before tax time, you will receive or can download a 1099-G form indicating your total unemployment benefits for 2020. If you have not had any tax withheld, that’s when you will need to come up with money to pay tax to the state and federal governments.
“It’s going to amount to a significant amount of income that has no tax taken out on it,” said Ryan Sather of Esterbrooks Scott Signorelli Peterson Smithson, Ltd. In Duluth.
Things could get even more complicated for those who were making more money with the extra unemployment than they usually make for their work wages. When they return to work, even with the usual tax deductions, they may not cover the extra income that might actually boost them into a higher tax bracket.
Rosenbaum’s advice: “If you’re still on unemployment, start withholding state tax, increase your federal withholding or start saving money, because you’re going to owe money at the end of the year.”
One source of extra income immune from taxation is the stimulus checks, which will neither increase your taxable income for 2020 nor decrease your potential tax refund.
According to Sather, though, if taxpayers were eligible for some or all of the individual or family stimulus funds and did not receive it, they may be entitled to a tax credit on the 2020 return.
Finally, the payroll tax deferral that President Donald Trump plans to implement from Sept. 1 through Dec. 31 presents another potential tax trap for employees. According to FoxBusiness, the U.S. Chamber of Commerce joined 30 trade associations on Aug. 18 in asking the administration to consider other relief measures instead of a deferral. Without subsequent forgiveness of that taxable amount, the groups noted, workers could be on the hook for additional 2020 taxes not withheld, ranging from about $751 for those earning $35,000 to nearly $1,610 for those earning $75,000.
“Deferring payroll taxes is risky business – you’re just pushing that boulder down the street,” said Sather. He advises employees to request their employers continue to withhold the full amount because there is no guarantee it will ultimately be a forgiven tax. Sather said he does not favor “taking out a loan with the government.” Then there is no extra tax to pay later and if it becomes a forgiven amount, it will count toward a refund. Rosenbaum agreed.
“You still owe it (the taxes). It’s not a gift. You don’t want to defer paying payroll taxes.”
PPP and EIDL
For small businesses, this definitely has been a year of complicating capital letters. First came COVID, which begat CARES which begat PPP and EIDL.
The subtleties of how the Coronavirus Aid, Relief and Economic Security Act and its Paycheck Protection Program and Economic Injury Disaster Loans affect 2020 taxes are business-by-business complex (in other words, your individual situation may differ greatly from another).
If a business received PPP money and met all the criteria for it to become a grant, that amount is not taxable, according to Sather.
Another complication is how you used the PPP money. If any of it was used to pay for something that might otherwise be deductible, say rent or utilities, that amount is no longer deductible, both Sather and Rosenbaum said.
If part of that PPP funding actually continues as a loan, you may be able to count the interest as a business loan deduction, Rosenbaum noted. You need to be careful about what then becomes non-deductible.
According to the U.S. Chamber of Commerce, “A forgiven PPP loan is tax-exempt. However, using the loan can also reduce how much you can write off on your business taxes, so keep that in mind when applying for the loan. Usually, expenses like payroll, rent and utilities are deductible from your normal taxable income, and it means you owe less tax at the end of the year. Without the deduction, your business may owe more taxes than it normally pays.”
Sather’s advice to businesses on any PPP money that is not forgiven as a grant could be, unless you need to borrow it, to simply pay it back. “There is always an option to pay it back immediately if you haven’t spent it,” he advised.
He also strongly urges businesses that received any of the CARES or COVID-relief related money to pack away all the paperwork in case of a future audit. “Stick that in your tax file and keep it there for seven years.”
In addition to the federal aids, states and local governments also have been distributed various forms of business help. The Minnesota Small Business Relief Grants and the Coronavirus Relief Fund payments from local governments all must be added into businesses’ gross income for 2020, according to the Minnesota Department of Revenue.
Both Rosenbaum and Sather said that much of this year has been helping business clients navigate an application for COVID relief aid, then navigate the often-churning and change waters of how the rules apply and finally make application for PPP loan forgiveness.
The juggle of Small Business Administration options with PPPs and EIDLs were altered even as companies applied for one, the other or both, Rosenbaum pointed out. Your business might be eligible for both, but you cannot use them both for the same purpose. A misstep in interpretation could mean needing to repay one or the other, she said, adding that working with clients to do the proper applications will, “keep us pretty busy through the fall.”
That will take our regional accounting firms straight into 2020 tax time … a potentially brutal season.