CARES Act Cliff’s Notes

The CARES Act of 2020 had a few gems for the average US taxpayer, including:

  • No required minimum distribution for retirees in 2020
  • The opportunity to add up to $300 in charitable donation deductions for qualified 501c(3) cash contributions to the standard deduction on your 2020 tax return
  • Economic stimulus payments, depending on your 2020 adjusted gross income.

For more information, read the full bill.

Unfortunately, a lack of technical language in the bill left many in the difficult position of being unable to plan for taxes until late December.

For many small businesses in 2020, the Paycheck Protection Loan helped them keep employees on payroll and helped stretch their rapidly diminishing operating budgets. Businesses qualifying for loan forgiveness — having spent the funds on payroll costs, utilities, and rent for the business, as intended — were unable to plan for taxes with the IRS reminding us that the Internal Revenue Code does not allow for tax-free money to be used as tax-deductible business expenses. Essentially, the actual costs incurred for these items in 2020 would have been reduced by the amount of PPP Loan funds forgiven in 2020 for income tax purposes.

Many accountants and bookkeepers struggled with identifying the character and timing of the funds. Questions include:

  • Is it a liability if we are sure it will be forgiven?
  • Then is it technically a negative expense?
  • If it will ultimately increase taxable income, is it “other income?”
  • When is this recognized? When the funds are received or spent, or when the Small Business Administration officially “forgives” the loan?

There is little certainty of tax implications since this December 3rd letter was sent to members of the current administration in the House of Representatives and Senate, asking for immediate attention. The heart of it is that the CARES Act intended the funds to be tax-exempt, but the passed legislation did not include the technical verbiage required to achieve this intention.

The HEROES Act passed by the House in May of this year included this crucial relief, but it failed to be passed by the Senate.

Tax planning for this was impossible for any business owner navigating the PPP Loan implications. Finally, with less than two weeks before the new year, an entirely welcome passage of a Cares Act amendment and extension legislation was published. In an unpredictable year when everything took twice the energy, business owners who are always the people that forge ahead, innovate, create, contribute to their communities, employ families, and find reward in the work itself were stuck in the unlucky uncertainty created by politics and a pandemic.

If luck is being prepared for opportunity when it comes, may we all have a lucky 2021 indeed! Wishing you and yours the very best new year.