Stimulus Funds – To Tax or Not to Tax

Stimulus Funds – To Tax or Not to Tax

The year 2020 has been a tough one, as tough as they can get. Preliminary estimates indicate it was a year in which around 3.2 million Americans died; that was about 400,000 more deaths than in 2019. Some 318,000 of those fatalities can be attributed to COVID-19. In 2021, the virus continues to have a devastating effect. Before the end of February, coronavirus-related deaths in the U.S. are expected to cross the 500,000 mark. The economic fallout has been equally ruinous. Most notably, millions of Americans joined the ranks of the unemployed. Some have been thrown on the breadline. In just three months, Mar-May, over 14 million Americans lost their jobs. And the unemployment rate skyrocketed, reaching 14.8% in April 2020, the highest it’s ever been since records were first kept in 1948. At the end of the year, the rate had fallen to 6.7%, but was still much higher than the 3.8% it had been in February 2020.

To alleviate the hardship caused by these developments, Congress—through the CARES Act—provided a number of financial and other support measures for businesses and households. The Paycheck Protection Program (PPP) was set up to provide businesses with funds to help them avoid having to lay off workers. The funds were provided as loans, repayment of which could be forgiven, provided certain conditions were met. Most individuals received checks of $1,200 to boost their finances. Higher earners would have received less.

Now that it’s tax season, business owners and households alike must be wondering how these cash flows will affect their tax liability. Well, the news is all good. On the whole, stimulus funds will receive favorable tax treatment.

For Businesses

For small business owners, contractors and other self-employed individuals, funds received through the PPP escape being assessed for tax in, at least, three ways. First, any forgiven portion of a PPP loan will not be included in taxable income. Normally, funds received through a loan are not income, since the funds are returned as the borrower repays. However, if the loan is forgiven, the funds may be considered as part of taxable income. But the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) of 2021 makes it clear; loan funds that do not have to be repaid will not be excluded from taxable income.

Second, if the funds from a forgiven PPP loan or portion of the loan had been used to pay deductible expenses, then those expenditures will still be deductible. There had been some doubt about whether expenses paid with forgiven funds would qualify to reduce taxable income. Now, the issue has been clarified. The Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act (Economic Aid Act) signed into law on December 27, 2020 as part of the Consolidated Appropriations Act, 2021, makes clear that “deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is subsequently forgiven.”

Third, the Paycheck Protection Program Flexibility Act of June 2020 (Flexibility Act) overturns the provision in the CARES Act that restricted employers who receive PPP loan forgiveness from deferring payroll taxes incurred between March 27, 2020, and December 31, 2020. Section 2302 of the CARES Act allowed employers to defer the deposit and payment of the employer's share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. However, section 2302 (a) (3) forbid any entity that received PPP loan forgiveness from taking advantage of that benefit. But that is no longer so; the Flexibility Act has removed that restriction.

For Individuals

Individuals who received stimulus checks won’t have to pay more tax. No income tax is levied on stimulus payments. This will certainly be a boon to the many individuals and households that by the end of January 2021 had received two rounds of stimulus payments. The first payment was for a maximum of $1,200 per person, plus $500 for each child. The second had a maximum of $600 per person, plus $600 for each child.

Adjusted Gross Income (AGI) limits apply. Individuals with income of up to $75,000, those filing as “head of household” with income up to $112,500, and married couples with income up to $150,000 filing jointly, qualified to receive the full amounts. Those with higher incomes received reduced payments up to a ceiling of $100,000 for individuals, $150,000 for heads of household, and $200,000 for married couples.

Individuals who, for some reason, did not receive stimulus payments, can still get the funds by claiming a “rebate recovery” credit on their 2020 tax return. It’s possible that some taxpayers who are no longer required to file returns may have been left out. However, they must file a return to get the funds.