As you file your 2020 taxes, you will find that COVID-19 has had some major impacts on the process, as it has on most things over the past year. In fact, the IRS has delayed the start and deadline of tax filing season this year. There are multiple considerations for businesses and individuals alike for filing this year, from the impacts of PPP loans and ERCs to the tax implications of unemployment payments. Even if you haven’t filed with the assistance of a CPA in the past, 2021 is a good time to ensure you have an expert on your side. You may even want to amend past returns based on new regulations in 2020. Here are some of the unique circumstances that may arise when you file your 2020 taxes. Be sure to also visit Part 1 of our 2021 tax strategies series to learn about other changes.
Retirement Plan Withdrawals
Due to the pandemic, you may have opted to take penalty-free withdrawals from your retirement accounts to offset income loss related to COVID-19. One-third of these withdrawals should be claimed as taxable income on your 2020 returns, unless you think you will pay back the withdrawal to your account within the next three years. If you are unsure if you will be able to reimburse your account for the amount that you withdrew, it’s advisable to claim the one-third as income now. Then, you can seek a refund in the future if you do repay your account in the appropriate timeframe.
Working from Home
Have you found yourself working from home during the pandemic and wondering how this will affect your taxes? In most cases, you cannot deduct expenses from a home office unless you are self-employed. However, your employer should reimburse you for expenses you may have incurred due to working from home. Those reimbursements generally do not have to be reported as taxable income. If you are working from home in a different state than your usual place of employment, consult with an accountant about how to deal with state taxes.
ERC and PPP Loans
Initially, employers had to choose between ERC and PPP loans for managing payroll. However, under the new CAA, employers can retroactively use both, as long as they apply to different wage payments. Calculating your ERC eligibility is complicated, so it’s best to allow a CPA to handle the equation for you. Deductions of expenses that were covered with PPP loans that have been forgiven are also possible. However, the time at which the loan is forgiven can have tax implications. Keep in mind that reduced payroll taxes for family leave and paid sick leave will take the form of credits on your 2020 returns and will also need to be calculated.
SALT Deduction Cap
There is a new workaround from the IRS that applies to all states for the SALT deduction cap. The IRS rules are applied retroactively for states that had a SALT deduction provision in place. For states that have not enacted such a provision, the IRS rules can be applied directly. This process can be complex, but an accountant can help you navigate the process.
The IRS is increasing their interest in cryptocurrency income, and the 2020 tax forms have been adjusted to make questions about these transactions more visible. The IRS has also increased its work with third-party groups to identify cryptocurrency deals and track income that may have been unreported in the past. This kind of income will be tracked, so it is best to be transparent.
The Royce CPA Firm is here to assist you with a variety of tax preparation services designed to meet your specific needs. Find out more about tax preparation in Tucson from our CPA firm by calling (520) 321-4626.