As we approach 2021 – still in a pandemic – we need to be prepared for what will likely be a very confusing tax season for clients. As tax pros, we’re used to navigating the changes that come each season, but we’ve really been thrown a curve ball these past few years. From tax overhauls to pandemics, tax pros have done a great job navigating changes. Here’s a look at what will be top of mind for clients this coming tax season.
For business tax clients
When the whole world shut down, small businesses struggled to stay afloat. Even now as the holiday season approaches, the retail and hospitality industry faces reduced revenue due to COVID restrictions.
The Payroll Protection Program (PPP) helped many continue their businesses and personal lives and will definitely be top of mind. This program, which is now closed, was designed to provide an incentive for small businesses to keep workers on the payroll. The loans were made through nearly 5,500 lenders across the country and are forgivable if the business used the loan as specified. That said, be prepared to help your business clients with PPP forgiveness applications.
You will also need to know the ins and out of the Economic Injury Disaster Loans and how they work with PPP. The EIDL is designed to meet financial obligations and operating expenses (working capital and normal operating expenses) that could have been met had the disaster not occurred. This long-term direct loan program from the SBA provides 6 months of working capital/operational expenses. The loan is not forgivable and must be paid in full unless you later successfully roll it into a PPP loan.
Then there’s the EIDL Advance/grant, which allocated $1,000-$10,000 to businesses experiencing a temporary loss of revenue due to coronavirus (COVID-19). This grant does not have to be repaid unless you also have a PPP Loan. Businesses that received an advance/grant under the EIDL (Economic Injury Disaster Loan), in addition to the PPP Loan will likely have the amount of the EIDL advance/grant subtracted from the forgiveness amount of their PPP loan.
For individual tax clients
Business owners were not the only people who experienced hardship this year. Many people either lost their job or were furloughed, got sick and/or experienced COVID related deaths in their family. The government also offered programs to help these individuals out that will affect the 2021 tax season.
For those who took advantage of unemployment benefits, there are tax implications that need to be considered. Unemployment benefits are taxed by the federal government and possibly your state, however you don’t have to pay social security and medicare taxes on this money like you would on wages. That said, you’ll need to communicate with clients regarding their withholding. They could have opted to have 10% of their unemployment payments withheld to cover federal income taxes, which will help with a tax payment. If they are still receiving unemployment benefits, you can fill out an IRS Form W-4V – Voluntary Withholding Request to adjust their withholding.
Individuals who received the $600/week COVID relief through the government, also need to be prepared to report that on their 2020 tax returns as it is considered taxable income.
For individuals who contracted COVID-19 or had immediate family who did, medical expenses may be higher. If your client itemizes deductions and their total medical expenses exceed 7.5% of their AGI, they may qualify for a medical expense deduction.
For clients who will owe the IRS and don’t have a tax reserve, here are a few things to consider:
- Look into a payment plan with the IRS
- Start putting money aside for a tax obligation you might have down the road
- Make estimated tax payments
- Save part of your benefit payment to help cover a potential tax bill
As always, your clients will be relying on you to have the right answers and get them through the tax season as smoothly as possible.