COVID-19 Related Tax Issues

COVID-19 prompted a series of extraordinary tax law changes affecting both businesses and individuals, many of which continue to have compliance and planning implications. The CARES Act introduced the Employee Retention Credit (ERC), allowing eligible employers to claim refundable payroll tax credits for retaining employees during the pandemic. The act also provided for payroll tax deferral, net operating loss carryback provisions allowing five-year carrybacks of 2018-2020 NOLs (temporarily reversing TCJA's elimination of carrybacks), and a business interest expense deduction limitation increase from 30% to 50% of ATI for 2019-2020. The Paycheck Protection Program (PPP) provided forgivable loans to small businesses, with forgiven amounts excluded from income—a significant departure from normal cancellation of debt rules, with deductibility of underlying expenses confirmed by subsequent legislation. For individuals, Economic Impact Payments (stimulus checks) were sent in three rounds and were structured as advance credits against 2020 and 2021 taxes. The American Rescue Plan Act expanded the Child Tax Credit, the Earned Income Credit, and the dependent care credit for 2021. The FFCRA provided refundable payroll tax credits for emergency sick and family leave. Tax professionals must understand these provisions thoroughly to assist clients with return preparation and ongoing planning. Aurora Training Advantage's COVID-19 tax issues webinar provides comprehensive coverage for accounting professionals.

PPP loan forgiveness is not includable in the borrower's gross income under federal law—a determination that was ultimately confirmed by the Consolidated Appropriations Act of 2021 after months of IRS controversy. The CARES Act originally provided that PPP forgiveness would be excluded from gross income, but the IRS issued guidance in May 2020 (Notice 2020-32) stating that expenses paid with forgiven PPP funds would not be deductible, effectively creating indirect taxability. Congress responded in December 2020 with legislation explicitly overriding the IRS guidance, confirming that not only is PPP forgiveness excluded from income, but expenses paid with forgiven PPP funds are fully deductible. This resulted in a more favorable tax outcome than initially expected: borrowers received tax-free loan forgiveness while still being able to deduct all business expenses paid with the proceeds. For tax year 2020 returns filed before the clarifying legislation, some taxpayers may need to review whether amended returns are appropriate. Most states followed the federal treatment, though some states taxed forgiven PPP amounts or disallowed expense deductions—state conformity varies and should be verified for each applicable state. The basis of S corporation shareholders and partnership partners was also affected by PPP forgiveness income exclusion, which increased basis even though the income was excluded. Aurora Training Advantage's COVID-19 tax issues webinar covers PPP tax treatment in full detail.

The CARES Act temporarily reversed the Tax Cuts and Jobs Act's net operating loss (NOL) rules by allowing businesses to carry back NOLs arising in tax years 2018, 2019, and 2020 for up to five years. Under the TCJA, which had eliminated carrybacks entirely, companies with significant COVID-19-related losses had no ability to offset prior profitable years' taxes—the CARES Act's carryback provision provided immediate refund opportunities by applying these losses against income taxed at pre-TCJA rates as high as 35%. The CARES Act also temporarily suspended the 80% limitation on NOL utilization, allowing losses to fully offset taxable income in carryback years. Tax professionals should identify all eligible clients with NOLs in 2018-2020 and evaluate the economics of carrying losses back versus forward. Carrybacks to years with higher tax rates (pre-TCJA 35% rate vs. current 21% corporate rate) often produce greater total tax benefit than carryforwards. The election to carry back requires filing an amended return or application for tentative carryback adjustment using Form 1139 (for corporations) or Form 1045 (for individuals). The 2021 and subsequent NOLs are again subject to the TCJA's rules—indefinite carryforward with the 80% limitation and no carryback. Aurora Training Advantage's COVID-19 tax issues webinar helps accounting professionals identify and execute NOL planning opportunities for applicable clients.

Economic Impact Payments (EIPs), commonly referred to as stimulus checks, were distributed in three rounds under the CARES Act, Consolidated Appropriations Act, and American Rescue Plan Act. From a tax perspective, EIPs are structured as advance payments of a refundable tax credit—the Recovery Rebate Credit—against the taxpayer's 2020 or 2021 income tax liability, depending on which round they relate to. Because they are structured as credits rather than income, EIPs are not taxable and do not need to be reported as income on federal returns. Taxpayers who received less than the maximum payment amount for which they qualify—due to having a dependent child after the reference year, or due to income changing between the reference year and the payment year—can claim the additional amount as a Recovery Rebate Credit on their tax return. Conversely, taxpayers who received payments they were not entitled to (for example, due to a 2020 income increase above the phase-out threshold) are generally not required to repay the overpayment for the first and second rounds, though the third round is fully reconciled. For tax preparers, accurately reconciling EIP amounts received versus the allowable credit is essential to correctly completing Form 1040 for tax years 2020 and 2021. Aurora Training Advantage's COVID-19 tax issues webinar provides detailed guidance on EIP tax treatment and recovery rebate credit calculations.

The CARES Act created significant temporary relief for retirement plan participants and plan sponsors affected by COVID-19. Most significantly, the act allowed qualified individuals (those directly impacted by COVID-19 through diagnosis, job loss, or other specified circumstances) to take 'Coronavirus-Related Distributions' of up to $100,000 from eligible retirement accounts in 2020 without being subject to the normal 10% early withdrawal penalty. The income recognized on such distributions could be spread ratably over three years, and participants had up to three years to recontribute the distributed amounts to a qualified plan and claim refund of taxes paid. The CARES Act also waived required minimum distributions (RMDs) for 2020, providing relief to retirement account owners who otherwise would have been required to take distributions from declining account values at the market nadir. For retirement plan loans, the act allowed higher loan limits (up to the lesser of $100,000 or 100% of the vested account balance) and a one-year suspension of loan repayments for qualified individuals. These provisions required significant payroll and plan administration coordination to implement properly. Tax preparers assisting clients who took COVID-related distributions need to ensure proper three-year income reporting and recontribution tracking. Aurora Training Advantage's COVID-19 tax issues webinar provides accounting professionals with detailed guidance on all retirement-related COVID tax provisions.