Legislative and administrative responses to the COVID-19 pandemic have given America's taxpayers many short-term — and a few longer-term — tax breaks. From tax credits to filing postponements, here is a breakdown of the changes benefiting individuals and businesses.
FILING AND PAYMENT POSTPONEMENTS
In a series of notices issued in late March and early April, the IRS postponed many federal tax payment and return filing deadlines to July 15, 2020 (Notices 2020-18, 2020-20, and 2020-23). The relief applies to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020, including individuals, trusts, estates, corporations, and other noncorporate tax filers, and that period will be disregarded by the IRS in calculating any interest, penalty, or addition to tax for failure to file the forms specified in the notice.
Notice 2020-23 grants automatic relief to affected taxpayers — they do not have to file extensions or send documents to the IRS to obtain relief. The relief encompasses forms and their related schedules and attachments, and applies to time-sensitive acts listed in Regs. Secs. 301.7508A-1(c)(1)(iv) through (vi) and Rev. Proc. 2018-58 (including, for example, Form 990, Return of Organization Exempt From Income Tax, and Form 5500, Annual Return/Report of Employee Benefit Plan). The IRS has posted online FAQs about the relief at irs.gov.
Federal tax forms and payments covered by the relief include:
- Individual income tax payments and return filings on Form 1040, U.S. Individual Income Tax Return, and other forms in the 1040 series;
- Calendar-year or fiscal-year corporate income tax payments and return filings on Form 1120, U.S. Corporation Income Tax Return, and other forms in the 1120 series;
- Calendar-year or fiscal-year year partnership return filings on Form 1065, U.S. Return of Partnership Income, and Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;
- Estate and trust income tax payments and return filings on Form 1041, U.S. Income Tax Return for Estates and Trusts, and other forms in the 1041 series;
- Estate and generation-skipping transfer tax payments and return filings on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and other forms in the 706 series;
- Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and any supplemental Form 8971;
- Gift and generation-skipping transfer tax payments and return filings on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, that were due on April 15 or on the date an estate is required to file Form 706 or Form 706-NA;
- Estate tax payments of principal or interest due as a result of an election made under Sec. 6166, 6161, or 6163 and annual recertification requirements under Sec. 6166;
- Exempt organization business income tax and other payments and return filings on Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)); and
- Excise tax payments on investment income and return filings on Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, and excise tax payments and return filings on Form 4720, Return of Certain Excise Taxes under Chapters 41 and 42 of the Internal Revenue Code.
Other relief provided by the IRS includes:
Estimated taxes: First and second quarter estimated tax payments with April 15 and June 15 deadlines are now due July 15.
Unclaimed 2016 refunds: The deadline for filing a 2016 tax return to claim a refund, normally April 15, is extended to July 15. The return must be postmarked by July 15.
Installment payments under Sec. 965(h): Installment payments of the Sec. 965 transition tax due on or after April 1, 2020, and before July 15, 2020, are postponed to July 15, 2020.
American citizens living abroad: Americans who live and work abroad can now wait until July 15, 2020, to file their 2019 federal income tax return and pay any tax due.
PAYROLL TAX CREDITS
On March 18, Congress passed and President Donald Trump signed into law the Families First Coronavirus Response Act, P.L. 116-127, which was a general relief bill, but included among its many provisions are several tax credits for employers who provide paid sick leave or family or medical leave for their employees who miss work for various coronavirus-related reasons.
Payroll tax credit for required paid family leave
Subject to certain limitations, the act provides an employer payroll tax credit that equals 100% of the qualified family leave wages paid by the employer under the portion of the act known as the Emergency Family and Medical Leave Expansion Act (Division C of the act). The Emergency Family and Medical Leave Expansion Act requires employers with fewer than 500 employees to provide public health emergency leave under the Family and Medical Leave Act (FMLA), P.L. 103-3, when an employee is unable to work or telework due to a need for leave to care for a son or daughter under age 18 because the school or place of care has been closed, or the child care provider is unavailable, due to a public health emergency related to COVID-19. (Employers with fewer than 50 employees can be exempted from the requirement.)
The credit is available for eligible wages paid during the period starting April 1, 2020, through Dec. 31, 2020. The credit applies against the employer portion of Sec. 3111(a) old age, survivors, and disability insurance (OASDI) taxes or Sec. 3221(a) Tier 1 Railroad Retirement Act excise taxes. The credit is generally available for up to $200 in wages for each day an employee receives qualified family leave wages. A maximum of $10,000 in wages per employee would be eligible for the credit. The amount of the credit is increased by the amount of the Sec. 3111(b) Medicare tax imposed on the qualified family leave wages for which a credit is allowed.
If an employer claims the credit, the employer's gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified family leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed. The credit would not apply to the federal government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers also could elect not to apply the new provision for any calendar quarter.
Self-employed individuals: The act provides eligible self-employed individuals with a refundable credit against income tax for qualified family leave equivalent amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business (as defined in Sec. 1402) and would be entitled to receive paid leave under the Emergency Family and Medical Leave Expansion Act if the individual were an employee.
Wages paid under the Emergency Family and Medical Leave Expansion Act are not considered wages for purposes of the Sec. 3111(a) OASDI tax or the Sec. 3221(a) Railroad Retirement Act excise taxes.
Payroll tax credit for required paid sick leave
Subject to certain limitations, the act provides an employer payroll tax credit that equals 100% of the qualified sick leave wages paid by the employer under the portion of the act known as the Emergency Paid Sick Leave Act (Division E of the act). The Emergency Paid Sick Leave Act requires employers with fewer than 500 employees to provide up to 80 hours of paid sick time through the end of this year if the employee is unable to work due to being quarantined or self-quarantined or having COVID-19 or because the employee is caring for someone who is quarantined or self-quarantined or has COVID-19 or if the employee is caring for children whose school has been closed because of COVID-19 precautions. (Employers with fewer than 50 employees can be exempted from the requirement.)
The credit is effective for sick leave wages paid starting April 1, 2020, through Dec. 31, 2020. The credit will apply against Sec. 3111(a) OASDI taxes or Sec. 3221(a) Tier 1 Railroad Retirement Act excise taxes. The credit is generally available for up to $511 in wages (for workers who are quarantined or self-quarantined or who have COVID-19) and wages of up to $200 for other workers for each day an employee receives qualified sick leave pay. The credit would be available for up to 10 days per calendar quarter. The amount of the credit is increased by the amount of the Sec. 3111(b) Medicare tax imposed on the qualified sick leave wages for which a credit is allowed.
To prevent double benefits, employers' gross income will be increased by the amount of the credit (meaning the credit is not taken into account for purposes of determining any amount allowable as a payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses), and no credit will be allowed for wages for which a Sec. 45S family and medical leave credit is claimed. The credit would not apply to the federal government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers also could elect not to apply the new provision for any calendar quarter.
The credit can be increased by certain qualified health plan expenses of the employer that are allocable to qualified sick leave wages for which the credit is allowed.
Self-employed individuals: The act also provides eligible self-employed taxpayers with a refundable credit against income tax for qualified sick leave equivalent amounts. An eligible self-employed individual is an individual who regularly carries on any trade or business (as defined in Sec. 1402) and would be entitled to receive paid leave under the Emergency Paid Sick Leave Act if he or she were an employee.
Wages paid under the Emergency Paid Sick Leave Act are not considered wages for purposes of the Sec. 3111(a) OASDI tax or the Sec. 3221(a) Railroad Retirement Act excise taxes.
CORONAVIRUS RELIEF LEGISLATION
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, enacted on March 27, contains a host of tax measures as part of a $2 trillion aid package designed to help the economy as it suffers from the effects of the coronavirus pandemic. While the focus of the legislation is not tax, a large number of tax provisions are included in the bill.
Recovery rebates: The act provides for payments to taxpayers — "recovery rebates," also called "economic impact payments" by the IRS — which are being treated as advance refunds of a 2020 tax credit. Under this provision, individuals will receive a tax credit of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 (for other individuals). The credit is reduced by 5% of the amount of the taxpayer's AGI that exceeds those limits. The credit is not available to nonresident aliens, individuals who can be claimed as a dependent by another taxpayer, and estates and trusts. Taxpayers will reduce the amount of the credit available on their 2020 tax return by the amount of the advance refund payment they received.
Payments were scheduled to go out to most taxpayers in April. Taxpayers who filed a return for 2018 or 2019 and Social Security and Railroad Retirement benefit recipients generally did not have to take any action to receive a payment. Other individuals who did not file a federal tax return for 2018 or 2019 must file a tax return to receive a payment, even though they are not otherwise required to file a tax return.
Payroll tax credit refunds: The act provides for advance refunding of the payroll tax credits enacted in the Families First Coronavirus Response Act. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using Form 7200, Advance Payment of Employer Credits Due to COVID-19. The IRS is also waiving any penalties for failure to deposit payroll taxes under Sec. 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
Employee retention credit: The act creates an employee retention credit for employers that close due to the coronavirus pandemic. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are those that were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. However, for purposes of the credit, eligible wages do not include wages counted for purposes of the paid sick leave and paid family leave payroll tax credits in the Families First Coronavirus Recovery Act. Also, if an employer receives a covered Paycheck Protection Program loan under Section 1102 of the act, the employer is not eligible to claim an employee retention credit.
Employers can claim an advance employee retention credit on Form 7200.
Retirement plans: Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken up to Dec. 31, 2020. Coronavirus-related distributions may be repaid within three years. For these purposes, an eligible taxpayer is one who has been diagnosed with the SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with the SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care. Any resulting income inclusion can be taken over three years. The act also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.
The act temporarily suspends the required minimum distribution rules in Sec. 401 for 2020.
The act delays 2020 minimum required contributions for single-employer plans until 2021.
Charitable deductions: The act creates an above-the-line charitable deduction for 2020 (not to exceed $300). The act also modifies the AGI limitations on charitable contributions for 2020, to 100% of AGI for individuals and 25% of taxable income for corporations. The act also increases the food contribution limits to 25%.
Payroll tax delay: The act delays payment of 50% of 2020 employer payroll taxes until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates.
Net operating losses (NOLs): The act temporarily repeals the 80% income limitation for NOL deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
Excess loss limitations: The act repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
Corporate alternative minimum tax (AMT): The act modifies the AMT credit for corporations to make it a refundable credit for 2018 tax years.
Interest limitation: For tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 income for the computation.
Qualified improvement property: The act also makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property, fixing the so-called retail glitch introduced by the TCJA and making the property eligible for bonus depreciation.
Aviation taxes: Various aviation excise taxes are suspended until 2021.
Health plans: The rules for high-deductible health plans (HDHPs) are amended to allow them to cover telehealth and other remote care services without charging a deductible. In Notice 2020-15, the IRS also allowed HDHPs to cover testing for and treatment of COVID-19 without a deductible, or with a deductible below the minimum deductible for an HDHP.
Over-the-counter menstrual care products are added to the list of items that can be reimbursed out of a health savings account, Archer medical savings account, or health reimbursement arrangement.
About the authors
Alistair M. Nevius, J.D., is the JofA's editor-in-chief, tax. Sally P. Schreiber, J.D., is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact Nevius at Alistair.Nevius@aicpa-cima.com or 919-402-4052.