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Accounting 101: What Accountants Should Tell You About the COVID-19 Stimulus Checks

By Keith Morelli

TAMPA (April 1, 2020) -- The COVID-19 crisis, spreading across the globe, infecting hundreds of thousands of people and devastating economies in its path, has come at crunch time for U.S. taxpayers. April 15, typically the deadline for filing income taxes was just one more thing to think about during this “stay-at-home” mandate.

Last week, the Internal Revenue Service extended the approaching tax filing and payment deadline for individuals until July 15, providing some breathing space for taxpayers with other concerns right now. Figured into this are stimulus package checks for taxpayers to provide a boost to their individual situations and the overall economy in these difficult times, said Luke Richardson, an accounting instructor with the USF Muma College of Business’ Lynn Pippenger School of Accountancy, who teaches classes on taxation.

One other point: The stimulus checks do not have to be reported as income, nor will taxpayers be required to pay back any amount received, he said. Taxpayers receiving stimulus checks will owe no more tax on their 2020 returns than they otherwise would have without the CARES Act legislation.

Recovery Rebate Checks Are Advanced Refunds

“These ‘recovery rebates’ are described in the law as credits against the tax imposed for the 2020 tax year,” Richardson said. “In other words, the payments are advance refunds of (refundable) credits you may be entitled to claim on your 2020 tax return.”

That’s only the tip of the stimulus package iceberg for taxpayers, he said. To get specifics, taxpayers should consult their CPAs, who should be familiarizing themselves with the tax provisions of the recently passed CARES Act.

“This includes the recovery rebate payments,” Richardson said. “One interesting planning point involves the timing decision of when to file a 2019 individual income tax return if such a return has not been filed already. For some taxpayers, whose payment would be higher based on their 2018 tax return, it may be prudent to delay filing of the 2019 tax return.”

The new law directs the IRS to first look at taxpayers’ 2019 tax return to compute the payment, if those filings are already done. If not, the IRS will go back to the 2018 return instead.

For taxpayers, this means a decision must be made. A taxpayer who has not yet filed the 2019 return should take into account the relevant variables, including the adjusted gross income, marital status, number of children, and determine which year would yield the bigger payment.

It it’s 2019, they should file as soon as possible; if it’s 2018, then hold off until after the stimulus check is received.

Richardson said there are provisions in the stimulus package that can impact retirement plans as well, including waivers of early withdrawal penalties from qualified retirement plans and required minimum distributions.

Businesses Urged to Keep Workers on the Payroll

“For businesses,” he said, “there are provisions granting employee retention tax credits and payroll tax deferrals, plus changes to rules regarding qualified improvement property, net operating losses and business interest expense limitations.”

The Employee Retention Credit is designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19, Richardson said. The credit is available to all employers regardless of size, including tax-exempt organizations. The exemption is small businesses that take small business loans.

To qualify for the Employee Retention Credit, businesses must be fully or partially suspended by government order due to COVID-19 during the calendar quarter and gross receipts are below half of the comparable quarter in 2019.

As for all those retained employees working from home, on their personal computers, using their personal phones and taking up space in their homes, chances are slim they can write any of that off in next year’s tax filings, Richardson said.

“The rules surrounding the use of a home office are fairly strict,” he said. “In general, expenses for the business use of the taxpayer’s home are deductible only if they are attributable to a portion of the home used exclusively on a regular basis as the principal place of any business carried on by the taxpayer.”

Still, people will get checks upwards of $1,200 for individual taxpayers to $2,400 for those married and filing jointly.

What Should You Spend Stimulus Checks On?

“The hope is that this relief can help sustain households until the virus is under control and Americans can get back to resuming a sense of normalcy,” said Dan Bradley, a professor in the USF Muma College of Business Finance Department who holds the Lykes Chair in Finance and Sustainability.

So, what should people do who get the checks, either direct deposited into their accounts or receive checks in the mail?

“That’s simple,” Bradley said. “They should be spent very wisely. This holds for folks who have been laid off and for those that are still receiving a paycheck. In a few weeks, they may not have that paycheck.

“We have no idea how long this is going to last and/or if another stimulus package will be on the horizon,” he said. “Thus, the prudent move is to use the funds for essentials only.”