2021 Tax Filing Season Will Be Like No Other

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PPP, CARES Act Incentives, Unemployment Fraud In the Mix

By Susan Day, CPA, CGMA

Tax season will bring numerous changes and challenges for individuals and businesses this year, in large part due to the COVID-19 pandemic. Tax implications of Paycheck Protection Program loans and other relief measures will cause some delays in documentation and in tax return preparation, as we are still awaiting IRS guidance on the tax treatment of certain benefits.

Filing deadlines this year look a little different, with corporate returns due March 15 (with an extension to September 15) and individual returns due May 17, a change from the traditional April 15 date announced by the IRS on March 17.

Extensions will likely be much more common this year, as many taxpayers will find delays in receiving certain documentation, such as K-1 forms issued to investors in partnerships.

The IRS has set February 12, 2021, as the official beginning of tax filing season. This represents a delay from the starting date of past years and is an early indicator that this will be no typical tax filing season. It also means taxpayers who have refunds coming likely will not see them until early March even if they file their tax returns on opening day.

Below are some of the changes and challenges that will face individual and business taxpayers this year.

Individuals

  • If you have a refund coming, use the IRS’s Where’s My Refund tool to track its progress. Refunds will be issued later this year due to the late starting date of tax filing season.
  • The IRS will send out 1099 INT forms to report interest paid on 2020 refunds, so if you receive one don’t throw it away. Last year, the IRS paid interest for those individuals who would have filed on April 15, 2020 but didn’t file until July 15 because of the COVID-19-related delay in deadlines. If you were due a refund, you received interest on the delay, and you will receive a 1099 INT form if the interest was more than $10.
  • Income from unemployment benefits will be an issue for millions of taxpayers this year and will be complicated by the huge uptick in fraudulent unemployment claims last year. If you receive a 1099-G form for unemployment benefits that you did not receive, report the fraud to your state’s unemployment office if you have not already done so. Many taxpayers aren’t aware that their names and Social Security numbers have been used for a fraudulent claim until they receive the 1099-G. It may seem counterintuitive, but even if the claim was fraudulent and you never received any benefits, you still must report it on your tax return if you receive the 1099-G. It will be adjusted on your return, so you won’t have to pay any taxes on the bogus benefits. Most importantly, do not ignore the 1099-G if you receive it.
  • A deduction for charitable contributions made in 2020 is available to all taxpayers, even non-itemizers. You may deduct up to $300 in charitable contributions but remember to assemble the correct documentation.
  • If you received a COVID-19-related stimulus payment last year, it must be reported on your tax return as income, and it will be adjusted to reflect that you have already received the tax credit it generates. If you didn’t receive the full benefit, you can claim that on the tax return. Consult the IRS website for a tool that will allow you to obtain what is due. Conversely, if you received a stimulus payment that was more than you were due, you don’t have to pay it back. The important thing is to report the payments accurately on your tax return.
  • Chances are, you have been working from home much of the time since the COVID-19 pandemic spread across the country in early 2020, and you may have incurred expenses to create an adequate workspace. Unfortunately, the IRS doesn’t care. You may not take the home office deduction if you are a W2 employee of a company. Since 2018, the home office deduction has been available only to self-employed taxpayers.
  • Review your W2 carefully. If you work in one state but live in another, you may encounter some filing issues. Click here for more details.
  • Individuals who have investments in pass-through businesses may see a delay in receipt of their K1 forms, which will delay their ability to file income tax returns. This may result in the need to go on extension.
  • If you took a distribution out of your retirement plan due to COVID-19, remember to report that on your tax return. Your 1099-R will not say your distribution was due to the pandemic, so you must tell your tax professional. It is taxable, but you may spread the taxes over two years. If you pay the plan back within three years, the taxes will be refunded.
  • Cryptocurrencies are receiving more IRS scrutiny this year, with reporting of trading activity being moved to the front of the form 1040. If you have engaged in crypto trading, be sure to have all documentation related to fair market value.

Businesses

  • There are a lot of things to think about this year whether you are a sole proprietor, a C corporation or anywhere in between. Most important for small pass-through business owners to remember is that most of the COVID-19 relief provisions that benefit large corporations also are available to them, most notably including the Employee Retention Tax Credit (ERTC). If your ability to keep your business going was reduced or stopped due to the COVID-19 crisis, be sure to discuss that with your tax professional. There are relief provisions available.
  • Net operating loss (NOL) carrybacks created by the CARES Act are available at 100% for business losses incurred during 2020 and can be applied going back to the 2018 tax year by filing amended tax returns. If you had losses you previously carried forward, it may make sense to carry them back and recover some cash that you paid in taxes for previous years.
  • Congress in late December 2020 reversed previous policy and enabled businesses to utilize both Paycheck Protection Program (PPP) loans and the Employee Retention Tax Credit. But utilizing both will require careful calculations and documentation, and we are still waiting for guidance from the IRS around several issues. Many business returns may have to go on extension until the guidance is issued on the interplay between excess wages reported on a PPP loan forgiveness form and the ERTC.
  • If you received a PPP loan, the loan proceeds are not taxable as business income for federal purposes, but the rules regarding state taxation vary from state to state. Kansas, Missouri and Nebraska follow the federal policy. In Arkansas, state legislation is pending that would align the state’s policy with the federal policy of non-taxation of PPP loans.
  • While some states will not tax PPP loans as business income, they may not conform to the federal policy of allowing a deduction for expenses paid with the PPP loan proceeds.
  • Business interest expense limitations were relaxed in 2020 as part of the CARES Act, which will benefit all businesses but especially large companies. The CARES Act also eliminated the limitation on deduction for excess business losses for tax years 2018 through 2020. This move limited the deduction to $250,000 or $500,000 for joint filers; anything in excess would have to be carried forward.
  • Charitable contributions made by a business are deductible at 100% only for 2020, up from the normal 60%, another provision of the CARES Act.
  • Section 139 (I.R.C. § 139) incentivizes employers to help staff who have been impacted by COVID-19 in several ways, providing tax breaks for employers who make emergency disaster payments to employees, provide personal protective equipment, reimburse employees for the cost of home office equipment, pay for dependent care, and numerous other actions related to the COVID-19 pandemic. The tax incentives generally max out at $500 per employee.

Timing

The IRS is digging out from a huge backlog and is still processing 2019 tax returns and correspondence. This will likely impact the speed with which 2020 tax returns are processed. Have patience.

A good to follow, especially this year, is to get your information and documentation (when available) to your tax professional as early as possible. It’s unknown whether there may be further business shutdowns or other measures that could disrupt tax filing season, so it’s better to get everything in early to keep the process moving.

Also, utilize technology and safe distancing for all meetings. Use online portals or secure email to deliver documentation and meet virtually with your tax advisor.

Stay safe, and if you have any concerns about this year’s unusual tax filing season, contact your tax professional.