Tag Archives: CARES Act

How to Make Filing Your 2020 Returns Less Taxing

How to Make Filing Your 2020 Returns Less Taxing

Unquestionably, 2020 was a year full of unforeseen challenges. As much as we may want to put last year completely behind us, we need to file our 2020 tax returns before completely letting go. Although we speak about the challenges and frustrations of the past twelve months broadly, a few specific events will present unusual tax considerations for some Americans.

Taxation of Unemployment Compensation Income

More than 25 million Americans became unemployed during the pandemic and relied on unemployment benefits. Unemployment benefits are includable in gross income and, therefore, are subject to tax. This may come as a surprise, especially to the thousands of Americans who applied for unemployment benefits for the first time this year. Withholding tax from one’s unemployment income is voluntary through the completion of a form referred to as a W-4V and submission to the agency paying the benefits. If their withholding amount is too low to cover their tax liability or if they did not authorize withholding, taxpayers can make quarterly estimated tax payments. Given the economic instability and uncertainty we are experiencing, many taxpayers relying on unemployment benefits are unlikely to have the financial wherewithal to withhold any portion of that income. Even worse, they may have no means available to pay the tax when due. If they were unaware of the tax impact when receiving unemployment benefits, they should be prepared for the unexpected tax now.

Home Offices

On the flip side of the employment coin, another tax quirk created by the COVID-19 pandemic comes in the form of working from home. Many taxpayers spent time working from home last year (and some of us still are!). Had this pandemic occurred before the 2017 enactment of the Tax Cuts and Jobs Act (“TCJA”), millions of Americans would be eligible for a deduction for expenses incurred creating and operating a home office. However, the TCJA limited deductions for home office expenses to those who are self-employed and whose home office areas are a “room or separately identifiable space” used “regularly and exclusively” for work. Thus those of us who have properly designated home offices as a result of the pandemic that might otherwise qualify, but receive W-2s as employees are ineligible for such deductions.

CARES Act

Similarly, many Americans received government aid in the form of stimulus checks through the CARES Act. These payments are tax-free and are not required to be included in gross income on one’s federal tax return. Rather, they are treated as advances of 2020 tax credits and must be reflected that way on our 2020 tax returns. Some tax professionals anticipate many taxpayers will have discarded or misplaced documentation related to those distributions, which, in turn, increases the likelihood that returns will be inaccurate, which may delay refunds. Additionally, some tax professionals have recommended that the IRS setting up an online portal for taxpayers to look up the exact amounts they received in government aid under the CARES Act to ensure their 1040s are accurate, but no such portal has been created as of the writing of this post. Thus, it is important for taxpayers to locate and organize their documentation relating to any stimulus check payments.

PPP Income

On top of these challenges presented to individuals filing their 2021 tax returns, some businesses face the uncertainty of whether business expenses paid for with loans received from the Paycheck Protection Program (PPP) will be wholly or partially deductible on their 2020 returns.  Under the PPP, certain small businesses whose operations were directly impacted by the COVID-19 pandemic were able to secure loans to fund specified expenses, including eligible payroll costs, payments on business mortgage interest payments, rent and utilities during a period of 8 or 24 weeks after disbursement. Borrowers may apply for forgiveness of these loans within 10 months of their issuance, to the extent they are used for these purposes in the year the expenses are incurred. It was unclear under the original CARES Act whether the expenses paid with the forgiven loan proceeds would be deductible. In December 2020, Congress passed the Consolidated Appropriations Act, which finally clarified that business expenses paid with forgiven PPP loans are, in fact, tax deductible. This act supersedes prior guidance from the IRS, issued as recently as November 2020. While this came as a welcomed holiday gift to many, there may be S corporation shareholders and partners in partnerships with a lump of coal thrown in; the benefit may be somewhat less timely than anticipated given the quirks of pass-through entity taxation, effectively deferring the tax benefit another year. 


Carefulness has always been key when completing a tax return, but even more so when filing returns for tax year 2020. Any taxpayer who received a stimulus check should start looking for that piece of paper now — tax time will be here before you know it! As the COVID-19 pandemic persists while we await widespread distribution of the vaccine, the IRS has emphasized the need for taxpayers to complete their tax returns from the safety of home, and provides a number of services to assist taxpayers in doing so.  If you encounter any legal issues regarding your taxes, Flaster Greenberg can help; give us a call.

For more information on any of the information contained in this post, contact Kelly Barry or any member of Flaster Greenberg’s Taxation Practice Group

Kelly Barry is a member of the firm’s Business and Corporate Department and Taxation Practice Group assisting clients in a wide range of corporate matters, including those involving transactional law, tax, and trusts and estates.  She can be reached at kelly.barry@flastergreenberg.com or 856.382.3305.

CARES Act to Provide Needed Aid to Small Businesses Dealing with Uncertainty and Disruption

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The “Coronavirus Aid, Relief, and Economic Security Act” was signed into law by the President on March 27th in an attempt to curtail the massive economic fallout that is likely to result from the near complete shutdown of American commerce amid the COVID-19 pandemic. This comprehensive bill provides financial resources that augment the individual states’ responses. This alert will explain some of the relief provided by the CARES Act that affect businesses grappling with these difficult times. It provides only a summary of the highlights of the Act and should generally apprise you of the programs available.

The CARES Act allocates an additional $349 billion to loans and grants through the Small Business Administration (SBA). For small and midsize businesses, the most significant result of the Act is to amend Section 7(a) of the Small Business Act to create the Paycheck Protection Program (PPP).  The PPP provides loans of up to two and a half times a borrower’s average monthly payroll expenses (over the last twelve months) in order to pay employee wages, benefits, insurance premiums, mortgage, rent, and utility payments. “Payroll expenses” include employee pay, leave (vacation, sick, parental, family, etc.), and health insurance and premiums, but is subject to limitations for high earning employees. This program is designed to encourage and incentivize businesses with less than 500 employees to retain their labor force. Eligibility standards focus on whether the business was operational before the crises, not its ability to repay. The CARES Act also waives the “credit elsewhere” test and no longer requires a personal guarantee for PPP loans. All PPP loans have a maximum interest rate of 4%, but as shown below, some or all of these loans may be forgiven. Furthermore, the CARES Act provides that the SBA will pay principal and interest on existing and new SBA loans for six months.

PPP loans are eligible for forgiveness upon meeting certain standards and this canceled indebtedness will not be recognized as income. The SBA will forgive the amount that the borrower spent during the first eight weeks after receiving funds on: (i) payroll costs as defined above; (ii) interest on existing mortgages (iii) payments of existing rents; and, (iv) payments of existing utility service. Since the CARES Act is attempting to prevent job losses, a borrower’s eligibility to have its loan forgiven is proportionally reduced by any reduction in employees compared to the prior year. A borrower’s loan forgiveness is also reduced if an employee’s pay is decreased beyond 25% of his or her previous year’s pay. However, if an employer has already laid off or reduced an employee’s pay, it can reinstate that employee prior to June 30, 2020 without suffering a reduction in forgiveness.

In addition to the PPP, the CARES Act expands the availability of Economic Injury Disaster Loans (EIDLs) and expands the business entities eligible to receive them.  The CARES Act waives the need for personal guarantees for EIDLs less than $200,000 and approval is based strictly on the applicant’s credit score. Any applicant for an EIDL can also request up to $10,000 in an Emergency Grant that the SBA must distribute within three days. The advance payment through the Emergency Grant may not need to repaid but must be used to: (i) pay sick leave to employees; (ii) maintain payroll; (iii) meet increased costs to obtain materials; (iv) make rent or mortgage payments; or (v) repay obligations that cannot be paid due to revenue losses. Emergency funds or EIDLs that convert to SBA loans through the PPP can be forgiven as stated above.

The Act also provides valuable tax credits of 50% of the first $10,000 of wages paid by employers to each employee during the crisis. To be eligible, an employer must have had its operations fully or partially suspended due to a shut-down order or had its gross receipts decline by more than 50% compared to the same quarter last year. There are different rules concerning what wages are qualified depending on the number of employees a particular business employs. In addition to the tax credit, an employer or self-employed individual can defer payment of the employer share of Social Security tax and allows such payments to be made over two years with half due by the end of 2021 and other half due at the end of 2022. Additionally, the CARES Act expands the ability of businesses to offset operating losses and retroactively apply them to previous years (carry-back NOLs).

In addition, the CARES Act provides for tax credits for employers who pay the required enhanced leave for employees affected by COVID-19. Employers can receive tax credits for up to $511 per day per employee when they pay employees under sick leave. Much more information regarding paid leave can be found in Adam Gersh’s three part employer’s guide: Part 1 | Part 2 | Part 3.

The CARES Act requires the SBA to promulgate rules promptly that should provide some more details on the available funds, process, and administration of these loans. Interested borrowers should contact the SBA here.  Additionally, funds are available at the state and local level and will be the topic of another Flaster Greenberg post in the near future.

Finally, the CARES Act expanded the number of businesses that can seek Chapter 11 bankruptcy relief under the recently enacted Small Business Reorganization Act of 2019 (SBRA). For the next year, the SBRA is available to businesses that owe less than $7.5 million in total debt, which is nearly three times higher than the original SBRA limitation. The SBRA, like a more traditional chapter 11 bankruptcy, allows a debtor to reorganize its balance sheet with the intention of setting forth a bankruptcy plan that will allow the company to operate profitably in the future. The advantage of the SBRA is that it is designed to provide a streamlined process, reduce costs, and provider a quicker exit from bankruptcy as compared to the traditional Chapter 11 bankruptcy where its cost can be a significant barrier to entry. Although businesses rarely want to consider bankruptcy, it can prove to a significant step toward regaining solvency and emerging from this crisis.

If your company is one of the millions struggling with this disruption, it should consider whether it can utilize the funds available in order to meet the short-term liquidity crunch. As always, Flaster Greenberg’s attorneys are available to assist you and we are here to help your company through this difficult time. The next section contains important links that can provide assistance to businesses.

COVID-19 Resources

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Damien Nicholas Tancredi
 is a member of Flaster Greenberg’s Bankruptcy, Financial Restructuring and Risk Management Department focusing his practice on bankruptcy, specifically representing unsecured creditors and creditors’ committees, chapter 7 trustees and chapter 11 debtors. He also represents businesses in commercial litigation and corporate matters in Delaware, Philadelphia and South Jersey. He is admitted to practice law in Pennsylvania, Delaware and New Jersey as well as the United States District Court for the districts of Eastern Pennsylvania, Delaware, and New Jersey. He can be reached at damien.tancredi@flastergreenberg.com or 215.587.5675.

 

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