How to deal with everything from PPP loans and EIDL grants to unemployment to COVID expenses (Zoom subscription, anyone?).
One of the upsides of having a tough year, business-wise? Odds are good you’ll get money back when you file your 2020 taxes.
But as you organize your financial information ahead of tax season, you likely have some COVID-related questions looming. Will you be taxed on your PPP loan? Your unemployment? And can you write-off that Zoom subscription you purchased back in April?
Here’s the skinny on this year’s (extra-complicated) tax prep, according to two accountants.
How to Treat COVID-Related Aid
Stimulus check: Although you won’t owe money on your stimulus payment, you will need to tell your tax preparer how much you received, says accountant Jessica Scheitler, owner of the Las Vegas-based tax preparation firm Financial Groove. Listing your stimulus check as part of your 2020 financial picture lets the IRS know you received it—and if you didn’t, or only received half, you’ll get it as part of your refund.
Unemployment: The American Rescue Plan that was just signed into law allows those who earn less than $150,000 in modified adjusted gross income to exclude unemployment up to $20,400 if married filing jointly or up to $10,200 for all other eligible taxpayers. Anything beyond that you’ll owe taxes on. “If you didn’t have taxes taken out ahead of time, then you’ll owe money—on the low end, you’re looking at 15 percent,” says Scheitler. If you’re worried about being able to make that payment, know that the IRS offers payment plans (but you’ll be charged interest). Unemployment insurance is usually subject to state taxes as well, and while some states have adopted the federal changes, others have not.
PPP loans: If you received a Paycheck Protection Program loan for your business expenses—even if it was forgiven—you will not have to pay federal taxes on it (though you may have to pay state taxes on the forgiven loan, depending on where you live). Don’t forget that any business expenses the loan went towards are still deductible.
EIDL grant: Similarly, if you took advantage of the Small Business Administration’s Economic Injury Disaster Loan—or, more likely, the $1000 EIDL advance—you won’t pay federal taxes on it, though you may have to pay state taxes. You will be able to write off any expenses that the advance went toward.
Student loans: “Normally, you’d get to write off your student loan interest,” says Scheitler, “but student loans were largely put on hold as part of the pandemic relief. So if your numbers look totally different than they have in past years, that could be why.”
2020-Specific Dos and Don’ts
- DON’T forget to write off expenses related to COVID-induced pivoting, like equipment you’ve purchased—ring lights, cameras—or subscriptions, like Zoom. When it comes to cell phone/Internet usage and business use of your home, calculate it as a percentage of overall context. “We know that you put marley down in your living room and made it into a dance space, so you should calculate that space as your business use of home, but also factor in the amount of time it was used that way,” says Scheitler. Take a photo of your reconfigured space and save it to your tax files. “Explaining that three years down the road, in case of an audit, will be difficult otherwise,” she says.
- DON’T forget about January through March. You might be tempted to consider all of 2020 a wash, but for the first three months of the year, things (likely) operated normally. “You still need to do receipts for that time period,” says Scheitler.
- DO include cash and mobile payments in your income. If you made money via Venmo or PayPal—teaching dance or fitness classes on Zoom, say—it still counts as income, and should be listed accordingly on your return. (And you can write off teaching-related expenses to lower that amount, as you would with any other 1099 work.)
- DO include your charitable contributions. In past years, if you opted to take the standard deduction ($12,400 for 2020), any charitable contributions you made would not count toward lowering your taxable income. But this year, thanks to the CARES Act, you can deduct charitable contributions (up to a total of $300 cash) “above the line”—that is, outside of the standard deduction.
- DO make a tax payment by May 17 or your state’s deadline—whichever comes first. In general, Rus Garofalo, who heads the accounting firm Brass Taxes, advocates for filing your taxes earlier rather than later. “If someone’s getting a refund, it would be helpful to get that as soon as possible,” he says. “And if someone’s going to owe $5,000, I’d rather tell them that in February than in April, so we can figure out next steps.” Even if you opt to file for an extension, that only applies to the tax paperwork itself—not the money you owe, which will immediately begin collecting interest.
The Oft-Feared Audit
Many people equate claiming deductions or not earning a profit for several years in a row with a higher chance of being audited, but Garofalo says both correlations are faulty. “An audit is just a scary word for the government saying, ‘Show me how you got these numbers,’ ” he says. When it comes to whether or not you actually turned a profit with your dance business, the government, Garofalo says, is “agnostic—they care if you were trying to make a profit, not if you made a profit.” Plus, he adds, the audit rate is below one percent.
Even Scheitler, who is typically cautious about an income-to-write-off ratio, is laying aside her reservations. “That’s not going to flag in any way in 2020, because that’s just the state of the world,” she says.
A version of this article first appeared on dancemagazine.com.
Rachel Rizzuto reports on studio business for Dance Teacher and is a third-year MFA student at the University of Illinois at Urbana-Champaign.