As we approach the year's end, agents should take into consideration the numerous coronavirus-related tax changes that may have an impact on their 2020 tax filings.
To say that 2020 has been anything but ordinary would be a huge understatement, and as we approach the year's end there are several coronavirus-related tax considerations to keep in mind.
1) Loan management. If your agency received a Paycheck Protection Program (PPP) loan, a recent U.S. Department of the Treasury ruling indicates the taxpayer may not deduct such expenses in the year paid or incurred if, at the end of the year, the taxpayer has a reasonable expectation the PPP loan will be forgiven on the basis of such eligible expenses.
However, a taxpayer will be permitted to deduct eligible expenses if notified that the request for their PPP loan forgiveness has been denied, or if the taxpayer decides not to seek forgiveness for the loan, with respect to such eligible expenses.
2) Property modifications and purchases. Many agencies have had to make modifications to their offices to help prevent the spread of COVID-19. It's important to keep in mind the bonus depreciated property rules enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), which allows an agency to write off up to 100% of the cost of an eligible or qualified property purchased after Sept. 27, 2017, and before Jan. 1, 2023, up from 50% under the prior law.
The definition of qualified business property includes property that has a useful life of 20 years or less, including vehicles, equipment, furniture and fixtures, and machinery. It does not include land or buildings.
If you are thinking of making additional qualified business property purchases prior to Dec. 31, talk to your accountant in advance to determine if the planned purchase qualifies for the deduction.
3) Home office. Another office-related consideration; if you are an agency owner, a 1099 contractor worker or are self-employed using a home office for your business, you may be able to deduct a portion of your housing expenses against business income. It's important to first note that if you are a W-2 employee, the TCJA eliminated the home office deduction.
If you fit into the above categories, there are two ways to deduct home office expenses:
- Simplified method. You can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
- Standard method. Track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees and repairs. Multiply these expenses by the percentage of your home devoted to business use.
For people whose home office is 300 square feet or less, they typically opt to take the simplified deduction. Under the IRS rules, you are allowed a deduction of $5 per square foot of your home that is used for business, up to a maximum of $1,500 for a 300-square-foot space.
4) Retirement plan distribution. Due to the financial hardship that many people experienced because of a job loss or reduced income, Section 2022 of the CARES Act provides some financial flexibility and relief if a person or their spouse was affected and took a retirement plan distribution from Jan. 1 to Dec. 31. The aggregate limit is $100,000 from all retirement plans and IRAs.
One of the chief benefits of the relief is that the 10% early distribution excise tax that would normally be applicable would not apply for a coronavirus-related distribution from a retirement plan or IRA.
There is also a big tax break on the timing for paying the income tax on the distribution. Instead of it all being included in a person's 2020 tax-year, the distributions generally are included in income ratable over a three-year period, starting with the year in which you receive your distribution.
For example, if you receive an $18,000 coronavirus-related distribution in 2020, you would report $6,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
5) Charitable donations. The CARES Act also created some charitable contribution tax opportunities. One provision provides a new above-the-line deduction of $300 for charitable contributions. The above-the-line $300 deduction for cash gifts cannot be given to donor-advised funds or supporting organizations.
However, the new deduction allows those who do not itemize their tax deductions to benefit from a tax deduction of up to $300 per individual from donating cash to a charity.
As always, be sure to check with your tax advisor regarding the applicability of the tax rules as it relates to your situation.
Dave Evans is senior director of Team & Total Insurance Solutions LLC and co-founder of 401ksleuth LLC, an independent financial education firm dedicated to helping companies lower their employees' financial stress by improving employees' financial literacy.