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Taxes & the Pandemic

Taxes & the Pandemic

Tax expert Alicia Hendricks untangles the tax-filing strings attached to COVID business and individual relief benefits.

The COVID-19 pandemic has seeped into every aspect of American life, from death to, inevitably, taxes.

The pandemic prompted a host of economic stimulus programs, extended and enhanced unemployment benefits, economic stimulus payments to individuals, child tax credits, PPP loans, and employer tax credits, among other programs. These measures surely rescued the economy from sinking even further than it did, but they also raise a lot of questions regarding filings for the 2021 tax year.

An understaffed, underfunded Internal Revenue Service is trying to cope with all of this, not to mention a pushed-back filing deadline in 2020 and legislative changes in programs and regulations throughout the year. The IRS is behind on processing 2020 and even some 2019 returns. As a result, tax refunds have been very late in arriving.

Still, the IRS has at least managed to post a main page for Coronavirus Tax Relief. That page links to 31 related topical pages, each of which drills down to still more pages on sub-topics.

Which are relevant to you as an individual tax filer? And which matter to you as a small business owner? We turned to Alicia Hendricks, tax manager at Accounting Plus in Columbia, to make some sense of it all. This is a cheat sheet, not an instruction manual. Think of it as a list of topics to bring up with your tax advisor.

Individual Taxpayers

Stimulus Payments

“Look over your bank records,” Hendricks says. “Know what you got and when you got it. There’s a lot of confusion on the part of taxpayers. Watch for the IRS letter or form that shows how much you were paid.”

More taxpayers than you might think did not notice the intermittent direct deposits and then called the IRS to claim their due and were double-paid. The benefits are not taxable, but they must be reported. Depending on timing and level of confusion, some taxpayers are receiving balance-due letters and notices of reduced or increased refunds — and they’re all arriving very late because of processing delays at the IRS. Some taxpayers moved and never received paper checks for which they qualified. That third stimulus payment, which started going out in March of 2021, appears to be a particular point of confusion.

Benefits for Families with Children

There were host of measures to help parents and kids via COVID relief legislation. Hendricks points out:

  • The Child Tax Credit rose to $3,000 for qualified children ages 6 through 17 and to $3,600 from birth to age 5. Since July, qualifying parents have received prepayments of $300 for kids under 6 and $250 for kids 6 through 17. These payments phase out depending on income level and filing status; changes in income as the year goes on can make a tax difference at filing time. Further nuance applies to split families; payments go to the parent who claimed the children on the 2019 or 2020 return. What if the kid aged out between 2019 and 2021, but the payments kept coming? No repayment is required for adjusted gross incomes under $80,000 for singles, $100,000 for head of household, $120,000 for married filing jointly. (None of this is simple.)
  • The Daycare Credit for 2021 rose in response to COVID. Allowable deductible expenses jumped from $3,000 (one child) and $6,000 (two children) to $8,000 and $16,000, respectively, and the  maximum credit rate rose to 50% from 35%. Again, income limits and phase-outs apply. (Note that the IRS publication covering this credit runs 20 pages. Have we mentioned that none of this is simple?)

Charitable Donation Credits

Taxpayers can now claim up to $300 per person for donations, even if they file with standard rather than itemized, deductions.  

Earned Income Tax Credit

“EITC applies to mid- to lower-income working individuals, including business owners who fall into those income brackets,” Hendricks says. EITC is a subsidy, not a deduction or tax cut. The qualifying age range, formerly 25 through 65, is now 19 to death. Taxpayers have the option to use their 2019 or 2021 tax returns as a basis to take the larger credit. The COVID-driven American Rescue Plan expanded EITC to provide small subsidies to childless workers and raised subsidies for workers with children.

Retirement Distributions

In typical years, many rules and tax penalties apply to retirement fund distributions, especially early distributions. At least seven such provisions have been relaxed or suspended in response to the pandemic. Hendricks says, “If you elected to have COVID retirement distributions taxed over three years, be prepared for the additional income that will be on your 2021 return — don’t miss it.”

Small Business Owners

Congress enacted a smorgasbord of measures aimed at keeping businesses, large and small, solvent. 

Paycheck Protection Program

This Small Business Administration initiative is No. 1 on Hendricks’ list of COVID tax considerations for businesses. PPP loans are intended to help companies keep their workers on the payroll through the hardest times. The loans are forgivable under certain conditions, so of course the loans come with rules designed to head off abuse. Banks served as middlemen, and that adds a layer of complexity.

“Each bank had its own way of handling the loans,” Hendricks says, “and people didn’t really know how to apply for the forgiveness.”

She goes on to explain conditions for forgiveness: Most of the loan funds had to go to payroll, but up to 40% could cover mortgage or rent, utilities, and COVID-related improvements (ventilation and air sanitizing equipment, plastic shields, etc.). All this had to be documented, and businesses had to apply for forgiveness within 10 months following the time period covered by the loan. That period can vary, as some loans helped businesses through eight weeks and others helped them through 24 weeks.

The tax implication: At first, a business could not claim expense deductions for costs covered by the loans. But by the time 2020 tax returns were due, the rules changed, and those expenses were again deductible. (Have I mentioned that this is all very complicated?)

The PPP loan program ended in May, but Economic Injury Disaster Loans — which must be paid back — are still available for COVID recovery. The maximum EIDL loan has been raised to $2 million from $500,000.

Employee Retention Credit

The ERC allows businesses to claim refundable credits for wages paid to full-time employees retained during various pandemic time periods. ERC was originally part of the CARES Act of 2020 and was extended and amended in the Consolidated Appropriations and American Rescue Plan Acts of 2021. It’s especially complex, but the rewards of successful navigation through ERC can be great, up to $28,000 per employee in some cases. The ERC program expires December 31.

Business Dining Expense Deduction

“This year and next year,” Hendricks says, “business travel and restaurant meals will be 100% deductible. It had been 50%.” The intent, she explained, is to help the hard-hit restaurant and hotel industries.

The Takeaway

Generally, tax preparers have a big push leading up to mid-April and then breathe a long sigh of relief. Of course they have their ongoing duties the rest of the year, but they can work at a slower, steadier pace.

Not this year. Due to the programs such as those listed above — and we have not listed all that were available or those that are ongoing — crunch time has vastly expanded for accountants and tax experts.

“We thought the new tax law of 2018 was a big thing,” Hendricks says. “But last year and this year, it’s been one thing after another.”

CARES, the Consolidated Appropriations Act, and the American Rescue Plan came out of Washington in quick succession in 2020 and 2021. The IRS had a hand in implementing several  provisions of each of them, even as the agency struggled to write rules and guides for those provisions and process returns for 2019 and 2020 at the same time. Hendricks and other tax experts did their best to keep up and to keep their clients informed of their obligations and opportunities. 

“The phone has never stopped ringing,” she says. 

“Usually, when new clients come to us, we ask them for one year’s prior returns. Now we ask for two years, because so many things carry over.”

Of course Hendricks’ firm, Accounting Plus, always welcomes new business. But if you’re thinking of switching over, maybe wait until 2022. To supplement our interview, Hendricks sent a crib sheet to break down the various tax provisions and help me write this story. On that crib sheet, she delivered her takeaway in all caps, highlighted in yellow and repeated three times:

It’s not a good time to do your own taxes or switch preparers.

It’s not a good time to do your own taxes or switch preparers.

It’s not a good time to do your own taxes or switch preparers.

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