Did you receive COVID-19 unemployment payments? Maybe a Paycheck Protection Program loan for your business? How about an Idaho return-to-work bonus?
What are the implications when you file your personal or business tax returns this year?
Last spring, Aki Kalatzakis obtained $43,000 from the federal Paycheck Protection Program to keep the 16 employees of Meraki Greek Street Food working.
The money from the forgivable loan prevented Kalatzakis and his wife, Farah, co-owners of the BoDo restaurant, from laying off their workers, and it allowed them to put aside money for rent and other business expenses.
What was unclear, though, was whether Kalatzakis and other business owners would be on the hook for taxes on the loaned amount.
“Initially, I heard that money was going to be taxable,” Kalatzakis said by phone. “But I was holding out hope that might not be the case.”
Four days before the end of the year, Congress passed legislation that allows business owners to deduct expenses paid with PPP loans. As a result, the loans aren’t liable for Idaho taxes, either.
Workers who received state and federal unemployment benefits aren’t as fortunate. They will be taxed as if those payments were regular wages. It’s the same for self-employed workers, independent contractors and gig workers who received state Pandemic Unemployment Assistance.
Workers who received state return-to-work bonuses and businesses and self-employed workers who received Rebound Idaho grants will also be liable for taxes.
On the other hand, the two rounds of federal stimulus checks that provided individuals $1,200 in April and $600 in December are not taxable. Anyone who is eligible and didn’t receive those checks will receive them as a tax offset when they file their income taxes in 2021.
The congressional action on PPP loans reversed an interpretation by the Internal Revenue Service that PPP proceeds would be taxable.
That’s good news for small businesses, said Jodi Whittaker, a certified public accountant and owner of Whittaker & Associates in Garden City.
“It’s very taxpayer-friendly,” Whittaker said in a Zoom interview. “I’m very happy to see that for my small business owners that are really struggling right now.
Kalatzakis hadn’t calculated how much he might have paid in additional taxes but said it would be significant.
“It would be really hard to come up with that money, just like it’s hard even to survive right now,” he said.
Kalatzakis said he’s preparing the paperwork to submit a forgiveness application. He said he expects to be approved as he used the money only for allowed expenses.
Confusion about whether PPP loan proceeds would be taxed was due to the haste in which Congress approved the CARES Act, which provided the loans, Whittaker said. The legislation contained a lot of ambiguities that had to be resolved, she said.
“The way the bill came out was not the intent of Congress,” she said. “When the bill came out, it specifically said that the expenses that were paid from PPP funds were not going to be deductible on the business tax return. Well, if an expense is not deductible, that means the money is taxable.”
Even before the coronavirus pandemic, unemployment compensation was taxed.
“It’s not considered wages, but it is taxable income, because it replaces wages,” Whittaker said. “So that makes sense that that would be taxable, and it is for federal and state.”
While Idaho gives people who obtain unemployment compensation an option to have federal taxes withheld from payments, no Idaho tax is withheld. As a result, residents may have a higher tax bill than they expected.
Both the IRS and the state of Idaho have additional information on tax liability on their websites.
One change this year is that taxpayers who don’t itemize on their federal return can take a deduction for charitable donations to recognized charities in 2020. The one-year change was made to encourage donations to charities suffering during the pandemic.