Your 2020 Tax Return and the Stimulus Payments

 

Let’s talk about your 2020 personal tax return and the two stimulus payments that you (may have) received.

The first round of stimulus checks was up to $1,200 for each spouse and $500 for each qualifying child.

The second round was up to $600 for each spouse and qualifying child.

So, if you have two qualifying kids and qualified for the maximum, you would have received $5,800 ($3,400 plus $2,400) between the two rounds.

How do you not qualify for the maximum?

One way is easy: you had too much income.

The second way is nonintuitive: the child was over age 16. A qualifying child means a child under the age of 17. Seems odd to me to exclude a high school senior, but there it is.

Let’s talk about the first non-qualification: income.

Let’s use a married couple with two qualifying children as our example.

The income limit for marrieds is $150,000. Past that point the stimulus check goes away by a nickel on the dollar. The maximum for two spouses is $2,400, so we can calculate this as follows:

                      $2,400 divided by .05 = $ 48,000

                      $150,000 plus 48,000 = $198,000

All right, the stimulus for marrieds burns-out at $198,000, right?

Nope.

Why?

Because of the qualifying children.

Each of the kids adds another $10,000 to the phaseout range.

We have two kids. That means $20,000 added to the $198,000, totaling $218,000 before we burn-out of stimulus altogether.

Are we stilling phasing-out at a nickel on the dollar?

Let’s check.

           $218,000 – 150,000 = $68,000

           $3,400 divided by 68,000 equals $0.05.

Yep, nickel on the dollar.

You received the first stimulus check in April, 2020. Remember that tax returns were automatically extended until July 15, 2020 because of COVID. The odds were extremely good that the IRS was not basing its calculations on your 2019 return, because your 2019 return had not been prepared, much less filed. For most of us, the IRS was looking at our 2018 tax return.

Let’s continue.

You received your second stimulus check very late in December, 2020 or (more likely) January, 2021 – but the income phaseout range was the same.

What did change was the tax year the IRS was looking at. By December, 2020 you would have filed your 2019 tax return (let’s skip paper filings that may not have been processed by then, or we are going to drive ourselves crazy).

If your income went up from 2018 to 2019, you would have climbed the phaseout range. You might have received a first stimulus check, for example, but not qualified for a second one. It could have gone the other way, of course, if your income went down in 2019. 

Now your 2020 tax return lands on my desk and we need to settle-up on the stimulus.

How do we settle-up?

We run through the income phaseout range … again.

Using your 2020 tax return this time.

Did you notice we are doing the calculation three times using income from three different tax years?

Yep, it’s a pain.

Mind you, if you have modest income, I know that you received the maximum stimulus.

Conversely, if you made bank, I know that you received no stimulus.

Fall in between – or have wildly varying income – and I you need to tell me the amount of your stimulus checks.

Let’s go through a quick example, using our married couple with two qualifying children.

Their 2018 adjusted gross income was 201,000.

Here is the first stimulus:

phaseout start			150,000.00
phaseout end		198,000.00
add: 2 children		20,000.00
			218,000.00
				68,000.00
2018 AGI			201,000.00
				51,000.00
First stimulus		2,400.00
		1,000.00
			3,400.00	times	51,000.00	=	2,550.00
					68,000.00
			(2,550.00)
			850.00

They would have received $850.

Their 2019 adjusted gross income was $320,000.

Way over the income limit. There was no second stimulus.

Their 2020 tax return lands on my desk. Their adjusted gross income is $104,000.

Way below the income limit. Full stimulus.

Two qualifying kids. The maximum over two rounds of stimulus would be $3,400 plus $2,400 = $5,800.

They already received $850 per above.

That means a $4,950 credit on their 2020 individual tax return. I look like a hero.

But why? After all, their 2019 income was over $300 grand – way above the range for receiving any stimulus.

The quirky thing is that the stimulus is based on one’s 2020 tax return. Congress however wanted the money out as fast as possible. The stimulus had an income test, though, so the first option was to do the calculation on one’s 2019 tax return. When that option proved unworkable, the second option was to use 2018. It was messy but quick, and one would settle-up when filing the 2020 tax return.

Congress realized that settling-up could mean repaying some of the stimulus money. Since that somewhat negated the purpose of a stimulus, Congress decided that the gate would only swing one way. If one did not receive enough stimulus, then one could claim the shortfall on the 2020 return. If one was overpaid, well … one got to keep the money. 

It was a win:win.

Not so much for the accountant, though.

SBA Paycheck Protection Program

The last couple of weeks here at Command Center have been … unprecedented.

We have sent employees home, although we have not let anyone go.

Critical personnel (including me somehow) are still coming in, although we are instituting a policy of one-person-in-the-office-at-a-time.  

I understand working at home, but a typical accounting firm is not geared to work from home indefinitely. For one thing, it takes administrative staff to keep the information and document flow going to the at-homers, and there is no administrative staff.

Fortunately, the IRS and many (if not most) states have acknowledged the reality of the situation and are allowing extensions of time to file and pay. There was probably no choice: preparers were not going to be able to get the work done anyway. It is likely that your return will be extended this year, even if you have never extended before.

Some of our clients have shut down. One, for example, works with product promotion at Kroger’s. Have you been to a Kroger’s recently? The last problem they have is moving merchandise.

Let’s talk about something. There is a brand-new SBA program for emergency funding. It may be that you have never considered government assistance before, but these are extreme times.

We are talking about the “Paycheck Protection Program.” Congress took an existing SBA loan program and sweetened the pot. Its purpose is – flat out – to encourage employers to retain employees and – if the employer has already furloughed employees -to hire them back.

Here are the general features of the program:

(1)  It expires June 30, 2020.

(2)  Think businesses with less 500 employees, but there are exceptions.

(3)  In a bit of a surprise for the SBA, the program includes nonprofits (again, with less than 500 employees)

(4)  The maximum loan amount is 2.5 times average payroll during the one-year period before the date the loan is made.

a.    With adjustments for new businesses, of course.

(5)  That maximum caps out at $10 million.

(6)  The loan is principally to fund payroll (with some limitations), but it will also cover health insurance, rent, utilities and some interest expense.

(7)  Now think math:

A times B

A is the sum of those expenses described in (6) for the 8 weeks after you get the loan.

(8)  Let’s talk B.

B is a fraction. The government wants to know whether your workforce has gone up or down in number.

The numerator is going to be the number of employees between February 15 and June 30, 2020.

The denominator is the number of employees during the same period in 2019.

There are adjustments for real-life situations that do not fit the above periods.

There is also a test which substitutes payroll dollars for the number of employees. You fail the test if your payroll reduction (dollar-wise) exceeds 25%.

(9)  So what, you ask.

Let’s say you have 17 employees for the 2020 period.

Let’s say you had 16 employees for the 2019 period.

Fraction-wise, that is over 100%. Let’s round that down to 100%.

Let’s multiply that 100% by something.

What is the something?

The loan you took out.

Let’s say the loan was $125,000.

Multiply $125,000 by 100%.

You get $125,000.

The government will forgive 100 PERCENT of the loan! The entire $125,000 is gone, forgiven, paid-off, hasta luego, soyonara.

Wow.

(10)      Is there a follow-up to that?

Yep.

Generally, the forgiveness of debt results in income to the person whose debt was forgiven. It is why people get those 1099s in the mail from the credit card companies which have given up on collecting.

For purposes of this loan, the forgiveness will NOT count as income.

So let’s get this straight. You keep your employees on board. The government loans you money for your payroll. The government forgives the money. You walk away scot-free.

What happens if you don’t get to 100%? Then a portion of the loan remains. You pay interest not to exceed 4% and repay that portion of the loan over a period of up to 10 years. Still … not bad.

Folks, if this is you – please check it out before the deadline or the funding runs out.

A TIGTA Report on IRS Contractor Payments

The Treasury Inspector General for Tax Administration (TIGTA) has released a new report titled “Deficiencies Continue to Exist in Verifying Contractor Labor Charges Prior to Payment.”

What happened is that the IRS received appropriations from the American Recovery and Reinvestment Act of 2009. You may remember this Act by another name – the “Stimulus.” TIGTA was auditing certain expenditures and also reviewing IRS internal controls over contract review, approval and payment.

TIGTA selected a statistical sample of $1 million in labor charges. What did it find?

(1)   The IRS could not document $394,430 of invoiced labor hours that were paid.

(2)   The labor rates paid were not verified to the contract for the qualification level of the individual paid.

(3)   Although the IRS verified the qualification and experience of key contract personnel, they did not do so for other personnel. The IRS was supposed to do this by the contract.

My Take: I am glad that someone is keeping an eye on these expenditures. An error rate of 39.4% is not too reassuring, however.