What Are The Tax Consequences of Accepting Stimulus Funds?


Could there be a light at the end of the tunnel? Well, the COVID-19 infection rate (and mortality total) in LA County is not as encouraging as one might hope.

But overall, stats are improving. Setting aside, of course, the overall national death toll, which has crested 100,000 (and some predict may double before this crisis has completely dissipated).

And as if the situation isn’t dire enough, already agitated citizens took to the streets in protest over the death of George Floyd while in police custody. Predictably, the protests went awry, with looting and property damage ensuing.

Yet, regardless of the turmoil, the show, as they say, must go on! If only to stop the bleeding, economically speaking.

And as we return to our “normal lives,” it’s time to start evaluating the financial impact — both personally and for business owners — of the billions in government stimulus funds that have been handed out with seeming total abandon over the last several months.

Toward that end, I want to share several key considerations to keep in mind…


Unemployment Benefit Taxation

If you’re one of the 33 million American’s who filed for unemployment benefits, no doubt those funds were a Godsend!

However, there will come a time at which you must “pay the piper.” And in this case, that moment arrives when you file next year’s income taxes…

Unemployment is considered taxable income. In addition, severance pay and other “buyout” funds you may have received when parting ways with your prior employer also qualify as taxable income.

Thus, it’s important to take note and plan accordingly for your 2021 income tax filing.

Tax Impact of Drawing Funds From Retirement Accounts

Most financial advisors and tax professionals agree dipping into retirement funds should be a last resort.

Considering the scale of present circumstances, however, it’s not unthinkable that you find yourself considering such a withdraw.

If this is the case for you, here are some important factors to keep in mind:

The CARES Act temporarily waives IRS penalties on withdraws from 401(k) and IRAs. But those funds must be repaid in full within three years.

Additionally, you have the option to withdraw principal funds from a Roth 401(k) plan without tax penalties. However, withdrawing earnings the account has generated is likely to trigger penalties.

Limits on Family “Gifts + Loans”

If you’re fortunate enough to have family or friends with monetary means to offer financial assistance, it’s hard to turn down such opportunities.

But it’s important to note, “gifts” that exceed $15,000 within a single calendar year must be reported to the IRS. And the gift recipient is responsible to pay income tax on those funds.

Also, loans between family and friends need to be carefully documented, including calculating and charging interest.

Now, this may seem antithetical in a “family and friends” sort of relationship. Unfortunately, the IRS views it differently… Providing an interest-free or a below-market-rate loan could be subject to taxes and penalties or outright consider to be a gift.


Tax Consequences for PPP “Loan Forgiveness”

PPP (Payroll Protection Program), a provision of the CARES Act, has rescued countless small businesses (at least in the short term).

But as the old saying goes… There’s no such thing as “free lunch.” And this is true when it comes to PPP funds.

On the upside, the CARES Act states forgiven PPP loan funds will not be added to your business’s gross income. And therefore, they’re not considered taxable.

However, the IRS recently issued an official notice indicating that expenses paid with PPP funds cannot be deducted if said PPP funds are “forgiven.”

Of course, not all PPP loans will be converted into “grants.”

Among other exceptions, if you reduced your employees’ pay by more than 25% while receiving PPP funds, the amount of your payroll reduction will not be forgiven.

For example, let’s say your payroll liabilities amount to $40,000. But through layoffs, furloughs, and pay cuts, you reduce your payroll to $25,000. The $15,000 gap will not be forgiven from your PPP loan.

But in turn, the amount not forgiven becomes “deductible income.”

Needless to say, it’s complicated. And you’ll be forced to sort this out when it’s time to file your 2020 returns. Of course, if you have any questions or concerns in the meantime, feel free to get in touch with me here…

PPP Loan Forgiveness Applications Now Available

The SBA has officially released the PPP Loan Forgiveness application. You can find the form here: PPP Loan Forgiveness Application Form

Also, be sure to submit your completed application form before the June 30th deadline.

It’s Time For Your Mid-Year Tax Checkup!

To say it’s been an eventful year is perhaps the understatement of the New Millennium. And nowhere is the impact likely to be more profound than when it comes to your taxes.

With so much new, often hastily drafted legislation, yielding countless changes to the tax code (some permanent, others only temporary), it’s more important than ever to be clear on your financial position and how your tax situation is shaping up for the 2020 fiscal year.

Which is why I highly recommend scheduling a Mid-Year Tax Checkup! We’ll review the particulars of your situation and formulate a plan that protects your best interests, financially speaking.

Get in touch to schedule your Mid-Year Tax Checkup TODAY!

I look forward to hearing from you!