When thinking of the CARES Act of 2020, what comes to mind? People probably think of the stimulus checks that a lot of people got. However, the legislation did a lot more for taxes than many realize.
The same is true of the Consolidated Appropriations Act and the SECURE Act. Before filing taxes, consider these laws and how they affect taxes for individuals and businesses.
Read on to learn about the tax implications of the CAA, SECURE Act, and the CARES Act.
The Consolidated Appropriations Act
The Consolidated Appropriations Act (CAA) combines multiple appropriations bills and provides more financial relief for those suffering during the pandemic. Part of it provided a second round of stimulus checks to people with qualifying income levels.
The other part is an omnibus spending bill for the fiscal year 2021. This Act also includes more funding for the Paycheck Protection Program (PPP), and it extended traditional debt restructuring.
Along with the amendments and exchanges, the CAA has a few tax implications for small business owners and individuals.
PPP Loan Forgiveness Taxation
The original CARES Act stated that income forgiven under the PPP isn’t part of a business’s taxable income. However, other expenses related to the PPP could face taxes.
Now, the CAA has changed the rules to allow tax deductions for first and second draw PPP loans. Unfortunately, this legislation doesn’t affect state or city income tax. Consult state and local authorities to determine if tax deductions are available for those expenses.
Still, not having to pay taxes on PPP loans at the federal level is an excellent way for business owners to save money. It’s also possible to save on taxes for expenses related to a PPP loan.
PPP Second Draw
Another exciting part of the CAA is an update to the PPP, particularly the ability to get a second loan. Businesses can use the funds for the same things as the first draw, including payroll and health benefits.
Now, a business can also use its PPP money for a few other things, such as:
- Some supplier costs
- Uninsured property damage costs during 2020
- COVID-19 worker protection costs
- Group costs for dental, vision, and other benefits
Whether a business received a PPP loan during the first round or not, owners can get more money now. The CAA also makes these new uses retroactive, so people can use funds from an earlier loan.
FICA Tax Deferral
The CAA also lets employers hold off on collecting the employee portion of the FICA tax. However, employers will need to collect on these taxes from employees if they did defer the collection and withholding.
If business owners deferred withholding this tax, they should give their employees time to return the money. As an employer, the CAA extended the deadline for repaying these taxes from April 30, 2021, to December 31, 2021.
Employees should make sure to pay back any taxes that their employer didn’t withhold from their paychecks in 2020.
One of the features of the CAA that most people know about is the stimulus check. If someone’s 2019 income was low enough, they qualified for up to $600 as an individual. They could have received more if they’re married or have children.
The stimulus checks aren’t taxable, so don’t report the money when filing taxes. However, people should use the money to pay for basic expenses or otherwise stimulate the economy.
This round of stimulus is an advance on a tax credit people can get when filing their 2020 tax return. If someone qualifies, they can use the extra money for whatever they need, and they won’t have to pay taxes on it.
Other Federal Assistance
Perhaps a business needs another type of SBA loan, like an economic injury disaster loan (EIDL). The owner can apply for this type of loan, which is helpful if they need relief for more than payroll and other covered expenses.
As long as the owner can support the expenses, they can deduct certain expenses that they pay for with the EIDL. They can do this at the federal level, but it could differ at the state or local level.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) has been in effect since late 2019. It aims to help people prepare for retirement, and it can affect taxes.
While it isn’t specific to pandemic relief, it can be useful as more people push off retirement so that they can support themselves. Whether someone is nearing retirement or not, the SECURE Act can affect taxes.
Consider a few factors it has changed.
Until the end of 2019, individuals could only contribute to an individual retirement account (IRA) or any other retirement account until they turned 70 and a half years old. However, the SECURE Act got rid of that maximum.
Now, people can contribute to an IRA at any age, so they can keep contributing as they work. If someone wants to work longer, they can save up more money and have a comfortable retirement when they do stop working.
Another change from the SECURE Act is the age when someone needs to start taking a required minimum distribution (RMD). Before the act, people had to take out money once they reached 70 and a half years old.
Now, people don’t have to take money out of an IRA until the age of 72. Having an extra year and a half may not sound like much, but it could help maintain a healthy balance in an IRA.
After the SECURE Act passed, it has allowed certain part-time employees to qualify for company-sponsored 401(k) accounts. Employees can qualify in one of two ways.
- Work 1,000 hours in the previous 12 months
- Work at least 500 hours each year for the past 3 years
If an employee meets the first qualification, the employer will have to make matching or nonelective contributions. However, employers don’t have to do that if an employee only meets the second point. This can affect both individuals and small business owners in terms of taxes and income.
Graduate students should also understand the SECURE Act and how it affected stipends. Before, stipends couldn’t count toward someone’s compensation when it came to contributing to an IRA.
However, now a stipend does count toward compensation. If someone wants to contribute to a traditional IRA, they can do so and get a jump on saving for retirement while in school. Then, they can deduct that money from their taxes and build a bigger retirement account.
The CARES Act of 2020
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 features many tax implications for individuals and small business owners. Many of the changes aim to help people and businesses that have struggled financially during the pandemic.
Whether someone owns a small business or works a traditional job, they should consider how the CARES Act can affect their situation, even long after the act initially passed.
Employee Retention Credit
If a small business retains and pays its employees throughout the pandemic, the business can get the tax credit. To get the credit, the business needs to show that operations shut down partially or completely due to the pandemic.
Another option is if gross receipts declined by at least half when compared to the same quarter the year before. Even if they can operate, if they lose business, they may be able to collect on the employee retention credit.
The CAA builds off of this, so it’s still available to businesses with the changes the CAA made.
Social Security Tax Deferral
The Social Security tax deferral is similar to the FICA deferral under the CAA. Small business owners have had to pay half, but they could let employees take the other half for the time being.
However, as with the CAA, employers need to collect on social security taxes. The difference is that employers need to pay half of the taxes due at the end of 2021 and the other half at the end of 2022.
Another thing to consider is that the CARES Act lets self-employed people defer half of their self-employment taxes. They still need to pay half as the employer portion, but they can keep the other half for immediate expenses and can pay it back later.
Early Retirement Withdrawal
Before the pandemic, people would face a penalty if they withdrew money from a retirement account too early. While they can still face a penalty, they won’t have to pay if they use the money for a few other select things.
Business owners can use the money to pay student loans for their employees or make certain charity donations. Consider any qualifying purchases to help avoid the penalty.
Understanding Acts and Taxes
The Consolidated Appropriations Act, SECURE Act, and the CARES Act of 2020 all made changes to taxes. Whether someone is an individual, a sole proprietor, or owns a business with employees, they should know how each Act affects them.
Then, they can file their taxes to the best of their ability and can reduce their tax liability. And they can use the extra savings to pay for bills or other necessary expenses.
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