COVID-19 Tax Updates
Coronavirus Tax Relief
Following are highlights of government assistance programs related to COVID-19 as well as links to additional information and resources for available programs and benefits. There are detailed summaries on the various COVID-19 related laws passed under the Tax Alerts section in our home and newsletters page.
Tax Year 2020 filing updates
Federal - The Internal Revenue Service (“IRS”) announced on Wednesday, March 17, that the federal income tax filing due date for individual income tax returns for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. (IRS notice 2021-59).
- This deadline relief DOES NOT apply to 1st quarter 2021 estimated tax payments due to the IRS by April 15, 2021. In addition, this extension of time DOES NOT apply to other federal tax or federal informational returns due by April 15 (e.g., C-corporations and trust returns).
State - The extension of time granted by the IRS for individual federal income tax returns DOES NOT automatically extend the time to file individual state income tax returns. Several states (including California) have already announced revised deadlines for various tax filings, but updates will continue. Link to summary of state filing deadlines.
IRAs - The May 17, 2021, deadline also allows taxpayers an extra month to contribute to their Traditional or Roth IRAs for tax year 2020.
Programs and support available to Individuals/Employees
Recovery Rebate checks – The American Rescue Plan Act of 2021 (“ARPA,” “Rescue Plan Act,” or “Act”) signed into law by President Biden on March 11, 2021 included a third round of stimulus payments. ARPA provides for $1,400 ($2,800 in the case of a joint return) of cash assistance to eligible individual taxpayers, with an additional $1,400 for each dependent. The one-time stimulus payments begin to phase out for higher-income individual taxpayers with an adjusted gross income (AGI) of $150,000 in the case of a joint return or surviving spouse, $112,500 for heads of household, and $75,000 for single filers. The stimulus amount phases down to $0 for a joint return with AGI over $160,000, $120,000 for heads of household returns and $80,000 for single filers. The IRS will base eligibility on the 2020 tax return, or 2019 return if 2020 has not yet been filed. Similar to the prior structure, the payments are essentially credits against 2021 taxes, but fully refundable and payable in advance. The payment will be reconciled on the 2021 tax filing with a final chance to claim the benefit based on 2021 AGI.
The IRS’s Get My Payment webpage has been updated to provide info on third round eligibility only.
The first two rounds of payments were offered in 2020 and are reconciled on current 2020 tax filings based on 2020 AGI.
- Round 1 through the CARES Act (Spring 2020) – Payment of $1,200 per adult taxpayer and $500 per child under age 17 as of 2020.
- Round 2 through the Consolidated Appropriations Act, 2021 (Early 2021) – Payment of $600 per adult taxpayer and $600 per child under age 17 as of 2020.
Increased Unemployment Benefits – Originally enacted under CARES both the Pandemic Unemployment Assistance (PUA) program and the Pandemic Emergency Unemployment Compensation (PEUC) program have been extended through September 6, 2021 under ARPA. The federal enhancement payment continues at $300.
- The Pandemic Unemployment Assistance program allows independent contractors, the self-employed, freelancers, and gig workers to qualify for up to 79 weeks of payments. Benefits are also paid for reduced hours or inability to work due to school closures, lack of childcare, or the need to quarantine.
- The Pandemic Emergency Unemployment Compensation program provides an additional 53 weeks of federally paid benefits to those who run out of state payments, which typically last 26 weeks.
Beginning with tax year 2020, the first $10,200 of unemployment compensation is tax-free for federal purposes for households with less than $150,000 of income. Please note that the taxation of unemployment benefits varies from state to state. (California does not tax unemployment insurance benefits.) If no taxes have been withheld on unemployment benefits received, there may be additional taxes owed with your tax filing. State-by-state unemployment contact information
Emergency Paid Sick Leave through Families First Coronavirus Response Act (FFCRA)
- Certain employees impacted by COVID-19 are eligible for 2 weeks of paid sick leave, plus an additional 10 weeks of emergency leave. Extended through September 30,2021. See the following posters: Federal Employee Rights and Employee Rights. More detailed information available below under businesses.
Benefits available for 2021 only
- Expanded Earned Income Credit to allow for use of 2019 income on 2020 and 2021 tax filings if earnings decreased. Phase outs and benefits amounts increased.
- Refundable Child and Dependent Care Tax Credit of up to $4,000 for one qualifying individual up to a maximum of $8,000 for two or more children available to households with AGI of up to $125,000.
- Refundable Child Tax Credit is increased to $3,600 for children under 6 years old and to $3,000 for children ages 6 to 17, subject to phase-out. Advance payment of 50% of the 2021 credit will be provided beginning in July 2021 through December 2021. The full value of this credit is available to married couples filing jointly with modified AGI of up to $150,000 ($112,500 in the case of heads of household and $75,000 in any other instance).
Relief for withdrawals from certain retirement plans and IRA’s (not extended for 2021 withdrawals)
- Taxes on withdrawals before December 31, 2020 can be spread over three years.
- Funds can be re-contributed within three years to avoid income taxes but would require filing amended tax returns.
- If under age 59.5, allowed to withdraw up to $100,000 from IRA’s and certain retirement plans without incurring the 10% early withdrawal penalty (income taxes will still apply).
- If subject to Required Minimum Distributions (inherited IRA’s are also included), 2020 withdrawals may be skipped without penalty.
- If RMD’s were taken in 2020, rollovers were extended to August 31, 2020 per IRS announcement IR-2020-127.
- Additional information available at the IRS website. (https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers)
Programs and support available to Businesses
Emergency Paid Sick Leave through Families First Coronavirus Response Act (FFCRA)
- Extended through September 30, 2021, the FFCRA provides up to two weeks paid sick leave plus an additional 10 weeks emergency leave for certain employees impacted by COVID-19. Leave for which a credit can be claimed is expanded to include time off to receive a COVID-19 vaccine, or to recover from a vaccine related illness or injury. Effective March 31,2021, the credit can only be claimed against Medicare taxes (not Social Security taxes). Details including Q&A are available at:
- Refundable tax credit against certain employment taxes (only Medicare tax after June 30, 2021), for wages paid to employees in businesses who have experienced either a full or partial suspension of operations in any calendar quarter due to government orders to limit COVID-19 or a significant decline in gross receipts.
- Can NOT be used for wages paid with forgiven Paycheck Protection Program proceeds (see above).
- Details on expansion of the credit under the Consolidated Appropriations Act, 2021 is here.
Paycheck Protection Program (PPP) through Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequently modified by Paycheck Protection Program Flexibility Act (PPPFA), and expanded under the Consolidated Appropriations Act, 2021 – ends March 31, 2021
- With the first round of PPP loans eligible for forgiveness, the Consolidated Appropriations Act, 2021 clarified Congress’ position allowing the deduction of business expenses paid with proceeds of a forgiven PPP loan. This is in direct opposition to IRS Notice 2020-32 which explicitly disallowed the expense deduction. While a welcomed clarification, state conformity or non-conformity to Federal treatment is still pending.
- Forgivable amount - the amount the borrower would expend during the covered period (24 weeks beginning on date of loan) on sum of payroll (maximum of $100k/year per employee), mortgage interest, rent, and utilities – payroll includes retirement and health benefits. Payroll for self-employed individuals is net earnings up to same maximum of $100k/year of compensation but does not include retirement and health benefits.
- Borrowers with PPP loans in existence prior to passing of the PPPFA can choose between the original 8 week period or the new 24 week period for forgiveness.
- The payroll portion of the PPP loan proceeds must be at least 60% to allow the loan to be forgivable.
- Second round of PPP loans available through the Consolidated Appropriations Act, 2021. $284.5 billion is available through March 31, 2021 with expanded eligibility to include not-for-profit organizations, $15 billion in aid specifically targeted to live venues, movie theatres and cultural institutions, and “second draw” for qualified borrowers who can show a loss of at least 25% of gross receipts in any quarter during 2020 as compared to the same quarter in 2019. Eligible uses of PPP funds include payroll, rent, covered mortgage, and utilities but have also been expanded to include:
- Worker protection and facility modification expenditures, including personal protection equipment (PPE), physical barriers, ventilation or filtration systems, and drive-through windows.
- Operating costs for software, cloud computing services, and accounting needs.
- Property damage costs due to vandalism or looting in 2020 not covered by insurance or other compensation.
- Expenditures to suppliers essential to the recipient’s operations.
- Can NOT be used for wages considered for the Employee Retention Tax Credit (see below).
- SBA details for Paycheck Protection Plan (PPP) Loans
- SBA PPP Loan Forgiveness Application
- PPP Round 2 Highlights
- Up to $10,000 emergency grant cash advance (subject to funding) that is forgiven if spent on paid leave, maintaining payroll, or several other obligations. SBA low-interest loan due to Coronavirus (COVID-19).
- Consolidated Appropriations Act, 2021 states that EIDL’s do not reduce PPP loan forgiveness and do not need to be subtracted in the forgiveness application. Borrowers who have already received forgiveness and had their EIDL Advance deducted can file an amended forgiveness application. Further guidance is expected.
Deferral of employees’ portion of payroll tax
- In August 2020, then-President Trump issued a memorandum allowing employers to defer their employee’s share of payroll taxes from Sept 1, 2020 through Dec 31, 2020. Employers were then required to increase withholding and pay the deferred amounts between Jan 1, 2021, and April 30, 2021. The repayment period has now been extended through Dec 31, 2021.
100% business deduction for meals is allowed for 2021 and 2022.
Additional information/links helpful to taxpayers:
- IRS – Relief for taxpayers Affected by Ongoing Coronavirus 2019 Pandemic
- California FTB announcements