With the start of the 2021 tax season on Feb. 12, the New Jersey Society of CPAs (NJCPA) reminds individual taxpayers and small business owners who are filing their 2020 tax returns that many benefits related to the COVID-19 pandemic are taxable. These include certain kinds of loan forgiveness, unemployment compensation and other credits and interest payments.
Some considerations for individuals when filing 2020 taxes include the following:
- Home office deductions. Even though many taxpayers are working remotely due to the pandemic, employees who receive a W-2 exclusively from an employer are not eligible for the deduction under the Tax Cuts and Jobs Act (TCJA).
- Unemployment compensation. New Jersey taxpayers who received unemployment because of the impact of COVID-19 have to pay income tax on it at the federal level but not at the state level. Taxpayers have to access NJ Form 1099-G at myunemployment.nj.gov.
- Charitable donation deductions. Taxpayers who have not historically been able to deduct their charitable donations are able to do so in a limited fashion this filing season. Under the CARES Act, individuals may claim a limited deduction on their 2020 federal income tax return. Married taxpayers (or those who file jointly) that take the standard deduction and made cash donations to charity in 2020 can get a tax deduction of up to $600. For single taxpayers, the limit is $300. However, note that the IRS has increased penalties over falsely claiming this deduction to 50 percent this year.
- Taking distributions from IRA accounts. If taxpayers took advantage of their IRA distributions because they were impacted by the pandemic, they have the ability to 1) not pay the penalties if under the age of 59 ½; 2) pay the tax on that income over three years; and 3) repay all or part of the amount within three years, which is longer than the typical 60-day timeframe.
- Interest from 2019 tax return. Those taxpayers who received a refund on their 2019 tax returns need to be aware that the interest payments are also taxable. According to the IRS, the interest payments were largely the result of the postponed filing deadline of July 15 due to the COVID-19 pandemic. The IRS will send a Form 1099-INT to those who received interest of $10 or more.
- Gig economy jobs. Taxpayers finding employment in the gig economy (which could have increased due to the COVID-19 pandemic) will need to be mindful that the income is taxable since no withholding has been taken out. The IRS has recommended that individuals in this situation make quarterly estimated tax payments to reduce the prospect of paying a lot at tax time.
“Knowing what you have already received in the form of stimulus checks and what you should have received is an important first step for taxpayers,” notes Andrea Diaz, CPA, APV, MST, partner at SKC and Co. CPAs, L.L.C. and a member of the NJCPA. “If you did not receive the amount you should have received, there is a way on your tax return to get the additional amount you are owed. For example, if you had a child in 2020, you may be entitled to receive the extra amount for the child.”
For those taxpayers who deferred paying Social Security and Medicare on their wages, Diaz explains, there are also important issues to be aware of when filing 2020 taxes. “When filing a tax return for an individual, it may show that they underpaid if they decided to defer their Social Security and Medicare tax withholdings. They need to make sure there isn’t an issue in reporting that on their tax return,” she says.
Gail Rosen, CPA, founder of Gail Rosen, CPA, PC, and a member of the NJCPA, adds that individuals need to stay on top of how they handled charitable donations this filing season due to the changes imposed. As Rosen notes, “The government wants to help nonprofits. They’ve been encouraging it.” She adds, “Typically only 10 percent of taxpayers itemize, and the rest take the standard deduction,” but for the 2020 tax filing season, she says, if taxpayers can take advantage of the charitable donation deduction, they should.
Remote working between states will also be particularly troubling this tax season for filers, says June M. Toth, CPA, CFF, CITP, CGMA, partner at zbt Certified Public Accounting & Consulting, LLC and a member of the NJCPA. She explains, “Typically, if you live in New Jersey but work in New York, the employer will withhold New York state tax and then you file federal, New York nonresident and New Jersey tax returns, where you get a credit on New Jersey’s return for the tax you paid in New York.” With the pandemic, new challenges arose, she says, noting that young adults who were living in New York moved back to New Jersey to reside with parents for what was expected to be a three- to six-week stay, only to have turned into six or more months. “These taxpayers, who worked remotely, may not have changed their state withholding with their employers and may have to consider apportioning their income based on number of days worked in the states. It’s possible they could end up paying tax to both jurisdictions.”
Some considerations for small business owners when filing 2020 taxes include the following:
- Loans distributed under the Paycheck Protection Program (PPP). A forgiven PPP loan is tax exempt on federal tax returns and on state income tax returns. Expenses paid with the loans are also tax deductible.
- Personal protection equipment (PPE) expense deductions. Business owners, as well as some individuals, such as teachers, are able to receive deductions for money they spent on PPE.
- Payroll tax credits. If employers had staff out due to COVID-19, who were taking care of someone who has COVID-19 or their children were out of school, they can receive payroll tax credits for those unable to work. Payroll family leave has been extended through the end of March 2021.
- Employee retention tax credit. This credit has been expanded significantly to include those who received a PPP loan, and it includes a wider array of employers who are eligible. However, they need to have fewer than 500 employees.
- Issue and file wage statements. For this tax filing season, the deadline for employers to file Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, was Feb. 1 (normally it is Jan. 31).
- Provide Forms 1099-MISC and 1099-NEC. The IRS also made Feb. 1 the deadline for sending recipients their Forms 1099-MISC and 1099-NEC.
As Toth explains, “A lot of businesses, when they applied for the PPP, understood that the receipt of funds was non-taxable, but they did not realize that the expenses associated with it would be non-deductible business expenses. According to a long-standing IRS rule, if you have non-taxable income, the expenses associated with that are not deductible. However, on Dec. 27, 2020, President Trump signed into law the Consolidated Appropriations Act which included much-anticipated relief for PPP recipients, allowing them to deduct the associated expenses.”
Taking advantage of the New Jersey Business Alternative Income Tax (BAIT), which allows some businesses to pay the state income tax associated with the profits of their business at the entity level instead of the individual level, is also helping New Jersey-based business owners. “New Jersey is one of nine states where flow-through entities, such as partnerships and S corporations, can take advantage of the state and local tax (SALT) workaround, so taxpayers are not limited to the SALT deduction cap of $10,000 on their individual federal tax return,” says Toth.
An analysis of the taxability of COVID-19 relief in New Jersey and federally is available here. If taxpayers need assistance in finding a CPA who can assess filing requirements, the NJCPA’s Find-A-CPA referral service can help. The free online search tool enables users to search for a CPA by location, specialty or industry.