Coronavirus Stimulus: How It (Could) Affect Your 2020 Taxes

Tolu Osinowo, CPA
19.06.20 05:06 PM Comment(s)

Hopefully, you were able to get at least one, if not all, of the coronavirus stimulus packages (CARES Act) that apply to you, whether as a business owner or as an individual. If not, there is still time. Banks and the SBA are still taking applications for the stimulus. I urge you to apply. If you don’t know which stimulus applies to you, check out our articles, Coronavirus Stimulus Bill - What You Need To Know And How To Apply   and  Where to Apply For Coronavirus PPP And EIDL Stimulus Loans If You Can't Get Through With Big Banks.

  

 To recap, the different parts of the stimulus are:  

    1. The PIP stimulus for individuals: Pays $1,200 per adult, non-dependent filers and $500 per child and dependents. For this, a married couple filing jointly will get $1,200 each for total of $2,400 for the adults, while single filers, get $1,200 each. Widow(er)s, married filing separately and head of household are considered single filers.

 

    2. Business owners qualify for the PPP forgivable loan. This is a loan made specifically to help employers meet payroll so workers can keep their jobs. Those who qualify include businesses, nonprofits, independent contractors, gig workers, and freelancers as long as they have 500 employees or less and were started by March 1st, 2020. This loan is 100% forgivable if you use only 60% of it on payroll and rent. This package is for businesses only and not for individuals.

 

    3. The EIDL non-forgivable loan, and the EIDL grant (each business qualifies for its own grant and loan). Those who qualify include small businesses, nonprofits, independent contractors, gig workers, and freelancers, as long as they have 500 employees or less and were started by March 1st, 2020. This package is for businesses only and not for individuals. Note: this package has two parts: a. the EIDL grant, and b. the EIDL non-forgivable loan.

 

    4. Individuals and small business owners also both qualify for the $600/week unemployment benefit. Business owners for the purpose of this package are the same for #2 and #3 above, including gig workers, freelancers, and independent contractors.

 

    5. Real estate agents, brokers, developers, and flippers (wholesalers and rehabbers) qualify for 1-4 above, both as individuals and as businesses. Real estate rental businesses only qualify for the EIDL packages (loan and grant). Real estate landlords still qualify for all packages in their other businesses and as individuals for #1, as long as their income is within the established limit. Rental businesses do not qualify for the PPP loan. 

 

If you have received one or more of the stimulus provisions above, amid a million other things to worry about is how they will affect your 2020 taxes. The government will stimulate the economy in many different ways, but try to recoup it somehow, especially from small businesses and individuals.

 

Let’s break this down. Taxes are about deductions and credits and one of the basic, yet obscure tenets of taxation is the prevention of what is called ‘double-dipping’. It’s the idea that only monies actually spent and NOT RECOUPED should have deduction and credit benefits. This means you have to have spent the money, and not have being reimbursed i.e. through insurance, refund or other means.

 


 Ways double-dipping shows up on tax returns 

  • Claiming a dependent – had to have spent more than half on keeping up a home used by the dependent.  

  • Casualty & loss deduction – total casualty amount is first reduced by any refunds received from insurance, then you go on to even calculate the deductible amount, after which you calculate the actual deduction. 

  • Tuitions are reduced by scholarships and grants.  

  • Business returns – refunded expenses are added back to increase net income (or reduce net loss).  

  • Business returns – refunds to customers are removed from gross revenue to reduce net income.

 


 So how does double-dipping affect your stimulus and tax return?  

If the government gave you money to live on, money which you purchased items with, some of which are deductions on tax returns, the government cannot then give you a deduction for those items which you didn’t purchase with your money, but with the government’s money. Make sense?

 

The government could apply the idea of double-dipping to 2020 taxes. If so, it could look like this:

 

The PPP loan being that it’s forgivable based on the portion spent on payroll and rent, means you would’ve used the government’s money to pay your payroll, rent and other expenses. Expenses paid for by the forgiven amount will not be deductible. Expenses paid for the amount not forgiven would be fully deductible. 

 

Note: You will have to apply for loan forgiveness to know which amount is forgiven and which is not. Click here to get help with your loan forgiveness applications.

 

The EIDL loan is not forgivable at all and has to be paid back. Because you are slated to give it all back, expenses purchased with this stimulus will be fully deductible. 

 

The EIDL grant is an advance that was given out for those who applied for the EIDL loan and is funded at $1,000 per employees up to 10 employees for a total of $10,000 per business. The employee count can include the business owner. So gig workers, freelancers and independent contractors, also count as employees and will get $1,000 each.

 

Per the stimulus bill, this grant is completely forgivable under all and any circumstance, and can be used on any purchase. Because of the generalization of this grant and because of the ‘under any circumstance’ provision, I don’t believe this will affect 2020 taxes at all. However, Congress can change its mind and promulgate new legislature or SBA might release new interpretations of some obscure part of the law. If either happens, this is how I think it will affect the taxes in one of three...

 

    1. Business owners will be asked to either increase their income, or net income by the grant amount. In this case, the expenses paid for by this part of the stimulus are deductible. This method is less likely because it only allows part of it (a small part) of the grant to be recouped by the treasury, and rather falls short if recouping is the goal. 

 

    2. Some staple deduction (like the standard deduction or itemized deduction) will be reduced by the amount of grant received or some other amount or percentage designed to capture the grant either in part or in full. I say staple deduction because not everyone qualifies for other deductions. They qualify based on what’s happening in their lives. 

 

For instance, only people who are in college or above qualify for tuition and fees deduction. This means a business owner who received the EIDL but doesn’t have higher education expenses won’t be able to properly apply their grant to this deduction, but a staple deduction like the standard deduction or itemized deduction can be used to achieve that end for everyone.

 

    3. The grant amount will be added to tax liability and will increase either taxes you owe, or reduce your tax refund. This is more likely to be the way it will be done because it allows for full recuperation of the grant. 

 

Depending on how each business recipient of the EIDL grant are organized, they will have to report and pay the taxes on either their individuals returns or the business return. Pass through entities like sole proprietors, single-member LLC’s, S- Corps, partnerships will have to pay the taxes for it on their personal return, but corporations will have to pay taxes for it only in the business. Most small businesses are pass through entities and sole proprietors also include freelancers, gig workers, and independent contractors.

 

The individual PIP stimulus works like the EIDL grant because it 1. “doesn’t have to be paid back”, and 2. can be used for anything. The difference is that the EIDL is for businesses and the PIP is for individual taxpayers. The PIP also doesn’t have to be applied for, it’s automatically paid out by the IRS.

 

I doubt the IRS or Congress will make people pay this back, but the rush precipitated by the coronavirus crisis means mistakes are made and things weren’t well-thought out or well-clarified, therefore anything is possible. 

 

If the individual PIP stimulus ends up having a pay back requirement, here is what it will look like...

 

    1. Taxpayers will be asked to either increase their income, or taxable income by the grant amount. This method is less likely because like in the EIDL grant, it only allows part of it (a small part) of the grant to be recouped by the treasury. 

 

    2. Again, like the EIDL grant, a staple deduction (most likely the standard/itemized deduction) would be reduced by the amount of grant received or some other amount or percentage designed to capture the grant either in part or in full.

 

    3. The stimulus payment could be added to tax liability and will increase either taxes you owe, or reduce your tax refund. This is the more likely methods because it allows for full recuperation of the stimulus. 

 

The unemployment stimulus is $600/week for 12 weeks. Typically, unemployment is taxed with taxpayers having a choice to have the taxes withheld at the time of payment or not. If the taxes are not withheld, the taxpayer would pay the taxes of their tax returns. With the massive and sudden loss of jobs, the goal was to get cash into people’s hands. This means unemployment agencies shouldn’t be taking taxes out at all. This also means the unemployment stimulus, if it will have tax consequences at all, should look like this...

 

    1. Add the benefits to income just like the standard way of reporting unemployment income. This means the entire stimulus payment would not be recouped, but it is the likely scenario because 600/week for 12 weeks is $7,200. The fractional taxes on this amount would be be manageable for most people, even with 40 million unemployed, especially because done this way, the tax on it will be at the taxpayer’s tax bracket and the standard (or itemized) deductions will still be applied to reduce the tax burden.

 

    2. The payment could be added to tax liability. This is a highly unlikely scenario because most people do not want to owe $7,200 when they are still struggling. However if this happens, your taxes owed will be increased or tax refund will be reduced.

 

Disclaimer:

These are the different ways I think each of the small business/individual stimulus package of the coronavirus bill will affect the 2020 taxes. As of now, there is no legislature dictating that any of these will have to be paid back, so this is all opinion. 


 

 

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