TAXING MATTERS
T. MARK RUSH, CPA
Partner
Ham, Langston & Brezina, LLP
[email protected]
How the PANDEMIC could
COMPLICATE 2020 TAXES
July 15 is Tax Day in 2020, and for some
taxpayers it could be a financial nightmare.
Covid-19 prompted the IRS to delay the April
15 federal tax-return deadline to July 15, but it
isn’t just 2019 tax returns that are due. The IRS
also postponed the first two 2020 quarterly estimatedtax
payments, which are normally owed by April 15
and June 15. This means that on July 15 it’s possible for
someone to owe half their estimated taxes for 2020 plus
any taxes owed with their 2019 tax return. That may be
bad news for people who have lost income in the past
few months.
On top of that, if you received a stimulus check, a
loan from the Paycheck Protection Program (PPP), or
unemployment benefits, your tax picture could get
even more complicated. To avoid the IRS penalty for tax
underpayment, along with some other insight, related to
estimated taxes in 2020 keep on reading.
How To Avoid A Penalty
If you are self-employed or a contractor, or a W-2
employee who does not pay enough in taxes during
the year through payroll withholding, you probably
should have paid quarterly estimated taxes in April,
June, September, and January. Anyone with substantial
taxable income that is not subject to withholding,
including retirees, may need to pay estimated taxes.
Underpayment of taxes subjects you to an IRS penalty.
You avoid a penalty through one of two safe harbors,
1) you owe less than $1,000 in tax for the year or 2) you
pay at least 90% of tax owed for the current year (2020),
or 100% of the tax you paid for the prior year (2019),
whichever is smaller. For adjusted gross income greater
than $150,000 ($75,000 married filing separately) on the
prior year’s tax return, the safe harbor is 110%.
Will The IRS Waive The Penalty In 2020?
It’s too early to say whether the IRS will reduce or
waive the penalty in 2020 or lower the safe-harbor
percentages. Changes in the safe harbor percentages
for 2020 will probably be considered. However, given
all the other issues demanding immediate attention at
the Treasury Department and the IRS its not likely to be a
high priority.
Special Issues For 2020
Special issues in 2020 related to estimated-tax
payments and the calculation of how much you owe:
1) your stimulus check, 2) Paycheck Protection
Program loans, 3) unemployment benefits
Stimulus Payments
Is your Covid-19 stimulus payment taxable income
that needs to be considered for estimated taxes? No,
however, you will still need to report the stimulus
payment as an advance 2020 tax credit next year when
you file your 2020 tax return. It should not affect the
amount of taxes you owe or the amount of any tax refund
you’re due from the IRS next year.
Paycheck Protection Program Loans
In Notice 2020-32, the IRS took the position that no
tax deductions are permitted for expenses, such as
payroll, that are funded by PPP loans which are later
forgiven. Under the IRS guidance, which may eventually
be reversed by Congress, the inability to deduct these
expenses affects the estimated-tax calculation by
individuals who own businesses that pass through their
income to the owners, such as with an S Corporation,
Limited Liability Company (LLC), or sole proprietorship.
Unemployment Benefits
So far in 2020, there have been over 36 million new
claims for unemployment benefits. Many of these
people are collecting unemployment for the first
time in their lives and may be confused about the tax
treatment. Unemployment benefits are taxable by the
IRS and by states that have income tax, including the
special Pandemic Unemployment Assistance (PUA) and
Pandemic Emergency Unemployment Compensation
(PEUC). Estimated-tax payments need to be made
on this taxable income unless you elected to have
federal income tax withheld with Form W-4V, Voluntary
Withholding Request.
20 MOMENTUM