As the 2020 pandemic changed the landscape of business early in the year, a few new changes to tax laws emerged with the intent to bring relief to those who suffered from the widespread shut down of business and the affect that it had on wage earners. Most of these changes sought to provide relief to individuals and families by giving more options to endure the period where incomes may have been drastically cut back or eliminated and the economy on main street was struggling.
Although most of these changes did improve the lives of people in our country, some individuals and families may find themselves affected by these changes in a negative way. Three changes that were brought about by certain relief programs and lifestyle changes could have an effect to increase the 2020 taxes due to the pandemic.
First, business owners and independent contractors may feel a tax change due to a shift to a stay-at-home, online, remote-working economy. Business owners that had abundant travel, hotel, and mileage costs to write-off in prior years may find these deductions are much smaller and less frequent for 2020. Deductions for business meals were also likely to be lower than in prior years, with many restaurants shut down for parts of the year and severely limited in ability to serve customers. The concept of business lunches and dinners was virtually non-existent in some parts of the country and the tax deductions associated with these business meetings also decreased. In addition, after being passed in late 2017, the Tax Cuts and Jobs Act (TCJA) applied a 50% limitation on deductibility of food and beverage expenses after December 31, 2017 and virtually eliminated deductions for business entertainment expenses, further reducing the amount that could have been deducted to reduce tax liability. It is worth noting that the Consolidated Appropriations Act of 2021 once again changed this tax law and allows the full deduction for business meals and entertainment starting again in 2021 and 2022.
Another change for 2020 came from the signing of the new Coronavirus Aid, Relief, and Economic Security Act, commonly known as the CARES Act. One important provision of this act provided that individuals under age 59 ½ could take distributions from a qualified plan through December 30, 2020, without the early withdrawal penalty that is typical with these distributions if taken early. This distribution could be considered a loan and paid back over the next three years, or could be taxable income with the tax liability spread out, recognized, and paid over the next three years. Until this distribution is paid back, it is required to be recognized as taxable income and would increase an individual’s taxable income for 2020 and potentially the next two years thereafter. If paid back, an individual would need to amend their prior year(s) tax filings to recover any taxes that they have already paid.
A third change for this year came when lawmakers increased the unemployment income to provide an additional $600 for the first 13 weeks of the pandemic. This initial period was extended for an additional 11 weeks of additional income after this first period passed. Some individuals may have received more income on unemployment assistance than when they were working. Since unemployment assistance and benefits are taxable income, some may discover they have a higher tax liability for 2020 due to these changes. It should be noted that stimulus payments, which many received once or twice during the year, are not taxable income and do not need to be reported on a tax return.
For most individuals, any increase to taxes for 2020 would be offset by an increase in income or decrease in expenses for the year. Individual tax situations and circumstances should be evaluated by a qualified tax advisor who could provide advice and assistance based on individual needs.