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
The change affecting the most taxpayers was the postponement of the April 15 filing and payment deadline for affected taxpayers — who were defined as any "individual, a trust, estate, partnership, association, company or corporation" with a federal income tax return or income tax payment due on April 15 (Notice 2020-18). Any affected taxpayer received an automatic postponement of the April 15 deadline until July 15 without having to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
Under Notice 2020-18, no interest, penalty, or addition to tax for failure to file a federal income tax return or to pay federal income taxes will accrue between April 15, 2020, and July 15, 2020, for any return or payment postponed by the notice. The Notice 2020-18 postponement applies only to federal income tax returns and payments (including self-employment tax payments) due April 15, 2020, for 2019 tax years, and to estimated income tax payments due April 15, 2020, for 2020 tax years. The payment and filing postponement was later expanded to include federal gift and generation-skipping transfer tax payments and returns in Notice 2020-20.
The IRS addressed many questions around the filing and payment postponements by posting online FAQs on March 24 (available at www.irs.gov. One key piece of information in the FAQs was that taxpayers who want a filing extension past July 15 have until July 15 to request an extension until Oct. 15.
Another was that second-quarter estimated tax payments are still due June 15, 2020, even though first-quarter estimated tax payments are not due until July 15. Update: Notice 2020-23 postponed the June 15 deadline for estimated tax payments to July 15.
The FAQs also clarified that the April 15 deadline for making 2019 IRA contributions has been postponed to July 15. Other deferred deadlines, according to the FAQs, include the deadline for paying the Sec. 72(t) additional 10% tax on certain distributions from an IRA or retirement plan and the Sec. 404(a)(6) grace period for employers to make 2019 contributions to qualified retirement plans.
However, the deadline for removing excess deferrals out of a retirement plan remained April 15.
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 are to 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 who 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.
|Alistair M. Nevius, J.D., is The Tax Adviser's editor-in-chief. Sally P. Schreiber, J.D., is a Tax Adviser senior editor. For more information about this article, contact firstname.lastname@example.org.