Thanks to several pandemic-related updates, filing your taxes this year will look a lot different than it did in 2019.
Three separate pieces of legislation related to the pandemic introduced various loans and stimulus payments. This guide will help you understand what you need to know to accurately file your 2020 income taxes.
Will I Have to Pay Taxes on Stimulus Payments?
During 2020, Americans potentially received two separate stimulus payments based on income. If you received stimulus money in 2020, you will need to report it on your taxes. However, according to George Birrell, CPA & Founder of TaxHub, New York, you don't owe any taxes on it. Birrell says, "One thing to be aware of for 2020 taxes is that stimulus checks were an advancement on 2020 tax credit.
If you did not receive the stimulus money you should have received in 2020, you can file for a tax credit for the missing amount. And Birrell shares another piece of good news, "If you received more than you were supposed to, you actually don't need to return any extra money that you received."
What About PPP Loan Forgiveness?
While some states may require you to pay taxes on the forgiven Paycheck Protection Program (PPP) loan amounts, you will not need to pay any federal taxes on them.
Andrew Schrage, CEO of Moneycrashers, an online resource community for making sound financial decisions based in Henderson, Nev., says that you will need to stay tuned for any updates from your individual states regarding these taxes.
"Some state legislatures are working to close this loophole and ensure state tax doesn't apply to PPP forgiveness, but there's no guarantee yours will do so by the tax filing deadline."
Additionally, Schrage suggests that even if you pay taxes on the PPP forgiveness this year, you may receive a credit next year. "You'll want to watch for news about retroactive credits as well. It's possible you'll need to pay taxes on PPP forgiveness in 2020, then claim a tax credit in the same amount in 2021," he says.
Even if business owners have received PPP Loan forgiveness, they may deduct business-related expenses from their income. But Nishank Khanna, CFO of Clarify Capital, a New York fintech company and small business, warns there is one significant caveat.
"Business owners need to have had their forgiveness application approved by the SBA. If your forgiveness application was denied or you did not apply for forgiveness, your taxes will be impacted."
Are There Really Sick Leave Credits for the Self-Employed?
The good news is yes. You may claim tax credits for two Covid-related scenarios as a self-employed person. According to Tim Yoder, Tax & Accounting Analyst at FitSmallBusiness in New York, "The American Rescue Plan Act of 2021 provides a credit for self-employed taxpayers that miss work related to COVID-19, such as quarantines, COVID-19 symptoms, or sickness." Yoder says, "The credit is based on the number of days missed times your average daily self-employment income."
According to Form 7202, partial credit is available not just for a sick person but also for any self-employed related caregiver for 67% of the daily lost income up to $200.