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COVID-19 pandemic prompts many tax changes

IRS introduced many relief measures for taxpayers to help them through the economic disruption caused by COVID-19.

These measures includes legislative and administrative changes to provide many short term and few long term tax breaks to America’s taxpayers, e.g. tax credits and filing postponements. Below is details of changes helping individuals and businesses:

FILING AND PAYMENT POSTPONEMENTS

In a series of notices released at the end of March and the start of April, the IRS postponed the return filing and federal tax payments deadline to 15th of July, 2020 (Notices 2020-18, 2020-20, and 2020-23). This relief is applicable to all taxpayers including individuals, estates, trusts corporates and non-corporate tax filers who have a deadline of submitting their tax return or payments after 1st of April and before 15th of July 2020. This period will be omitted by the IRS and will not be considered while calculating interest, penalty and addition to tax for failure to file the forms specified in the notice.

Notice 2020-23 provides automatic relief to effected tax payers, as they don’t have to send any document or file any extension to IRS. The relief encompass forms with their related schedules and attachments and applies to time sensitive acts listed in Regulations. Sections. 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).

In case of queries about relief visits FAQ page irs.gov.

Federal tax forms and payments covered by the relief include:

  • Return filling and individual income tax payments on form 1040, U. S. Individual income tax return and other forms in 1040 series.
  • Calendar Year or fiscal year corporate income tax payments and return filling on form 1120 U.S. Company Income Tax Return and other 1120 form 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: 1st and 2nd quarter estimated tax payments with April 15 and June 15 deadline are postponed till 15th July, 2020.

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 file their tax returns and pay any other tax dues until 15th of July, 2020

PAYROLL TAX CREDITS

President Donald Trump signed the Families First Coronavirus Response Act. P.L 116-127 passed by Congress on 18th of March. Though it’s a general public relief bill, it provides many provisions for tax credit for employers who provide paid sick leaves or family of medical leaves to their employees who miss work due to various reasons of Coronavirus.

Payroll tax credit for required paid family leave

Family And Medical Leave Expansion Act (Division C of the act) provides employer a payroll tax credit that equal 100% of the qualified family leave wages paid by the employer under the portion of family and medical leave act, with certain limitations. The Emergency Family and Medical Leave Act FMLA, P.L. 103-3 requires employers having less than 500 employees to provide public health emergency leaves where an employee is unable to work or telework as employee has to take care of his/her son or daughter under age 18, because all the care centers, schools are closed or all the child care providers are unavailable due to COVID-19 emergency (Employers with less than 50 employees are exempted from this requirement).

This credit is applicable to wages paid starting from 1st April, 2020 till 31st December, 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 available is up to 200$ a day paid to each employee on family leave wage up to a maximum of $10,000 per employee. 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.

On claiming the credit, the employer’s gross income increased to the amount claimed which mean the credit amount is not taken into account while calculating amount allowable as 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. This credit will not be applicable to Federal Government, State or any Subdivision of state or any agencies or instrumentalities of these entities. Employers have option not to apply the new provisions for any calendar quarter.

Self-employed individuals: 

The act provides eligible self-employed individuals with a refundable credit option against income tax for qualified family leave equivalent amounts.

An eligible self-employed individual is a person who regularly carried out any trade or business (as defined in Sec. 1402) and is entitled to take paid leaves under 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, Emergency Paid Sick Leaves Act (Division E of the act) provides an employer to claim a payroll tax credit of amount 100% equal to qualified sick leave wages paid by him to his employees. This act is applicable to employers with less than 500 employees and paid up to 80 hours of paid sick time through the end of year to employee who is unable to work due to being quarantined or self-quarantine or effected due to covid-19 or caring for someone who is effected with 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 applicable for leave wages paid starting from 1st April, 2020 till 31st December, 2020. The credit will apply against Sec. 3111(a) OASDI taxes or Sec. 3221(a) Tier 1 Railroad Retirement Act excise taxes. Generally, the credit is applicable on wages up to $511 for quarantined or self-quarantined or who have COVID-19 and wages for up to $200 for other employees for each day he received a 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 credit amount (it means the credit is not considered to determine any amount allowable for payroll tax deduction, deduction for qualified sick leave wages, or deduction for health plan expenses). The employer is not allowed to claim the credit for such wages which he already claimed under Sec. 45S family and medical leave credit. The credit would not applicable on the federal government, the government of any state or any subdivision of a state, or any agencies or instrumentalities of these entities. Employers have an option of not to choose 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 facilitates 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 massive tax relief measures as part of a $2 trillion aid package designed to help the badly affected economy as from the coronavirus pandemic. Although the focus of the legislation is not tax, yet a large number of tax provisions and necessities are included in the bill.

Recovery rebates: The Act provides the provision for payments to taxpayers which are being treated as advance refunds of a 2020 tax credit. These “recovery rebates,” also called “economic impact payments” by the IRS under which 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. Nonresident alien, individuals claimed as dependent on other taxpayers, estate and trust is not eligible to this credit. Taxpayers will deduct this credit amount from the tax credit available to them on their 2020 tax return by the same amount they received as advance refund.

These economic impact payments were scheduled to go out to most taxpayers in April. Taxpayers generally did not have to take any action to receive a payment who filed a return for 2018 or 2019 and Social Security and Railroad Retirement benefit recipients. 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 provision of advance refunding of the payroll tax credits enacted in the Families First Coronavirus Response Act. The credit for required paid sick leave and 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: This act provides provision for employers who retain their employees but bound to closed due to covid-19 pandemic. Eligible employers can request credit against employment taxes equal to 50% of qualified wages up to $10,000 for each employee. An employer is eligible for this provision only if he is operating a business in 2020 and its business operations is suspended fully or partially by the competent government authority limiting commerce, travel, or group meetings due to COVID-19. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the previous year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the previous year. For employers with more than 100 employees, only those wages will be eligible for the credit that the employer pays to 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 credit. However, for credit purposes, eligible wages do not include paid sick leave and paid family leave paid for the purposes of the Family First Corona Virus Recovery Act. Also, if an employer obtains a loan that covers the Pay Check Protection Program under Section 1102 of the Act, the employer is not eligible to claim employee retention credit. Retention credit can be claimed by employer using form 7200.

Retirement plans: Taxpayers can receive 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. Qualified distributions can be taken up to December 31, 2020 which may be payback within three years. Taxpayer infected with SARS-CoV-2 or COVID-19 or if any of their spouse is diagnosed with these disease or those facing 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 with the option of delayed repayment.

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 AGI on charity limitations is also amended to 100% of AGI for individuals and 25% of taxable income for corporations. Food contribution limit is also increased to 25% under this act.

Payroll tax delay: This act provide employers a relief to pay 50% of his payroll taxes until December 31, 2021. The remaining 50% will be due December 31, 2022. For self-employment taxes, 50% will not be due till the same dates.

Net operating losses (NOLs): The act temporarily repeals the 80% income limitation for NOL deductions for years beginning before 2021. For losses arises in 2018 to 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 non-corporate 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 introduces technical corrections regarding qualified improvement property under Section 168 to make it a 15-year property, to fix 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 of the High Deduction Health Plan (HDHP) have been amended to cover telehealth and other remote healthcare services received without deduction. 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.

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