US Tax Relief Related to the Coronavirus

US Tax Relief Related to the Coronavirus

The worldwide pandemic of the Coronavirus has caught everyone off guard and taken the world by storm. Not only has it overloaded the healthcare systems globally and brought cross-border travel to a halt, it has wrecked havoc on the economy both locally and internationally. As the US has become the focal point of the virus as of recently with the most cases of any country in the world, the federal government has responded by passing several laws to combat the economic uncertainty that has resulted from the virus, many of which relate to federal tax planning for US citizens residing both inside and outside the US.

The US Treasury has taken some pressure off of US Taxpayers by extending the filing and payment deadline for 2019 federal tax returns until July 15th, 2020. Previous IRS Announcements on this topic has only applied to certain types of tax returns, but now it is clear that this will apply to all tax return categories. Most states have also extended their filing deadlines as well to be consistent with the IRS.

Additionally, this extension also applies to 2019 IRA and HSA contributions, as well as employer contributions to qualified retirement plans. This extension also applies to the first quarter payment of estimated taxes for 2020, which is normally due on April 15th, however the second quarter payment which is usually due on June 15th is not extended.

The filing deadline does not apply to the submission of the Foreign Bank Account Report (FBAR or Form 114) with the US Treasury’s Financial Crimes Enforcement Network (FinCEN). But please don’t be alarmed by this, because even though the due date for filing the FBAR with FinCEN is April 15th, FinCEN has been granting US persons with this filing requirement who miss this deadline automatic extensions until October 15th. If you happen to miss the April 15th deadline for the FBAR this year, it’s highly unlikely that you’ll be penalized by FinCEN, as long as you get it filed by October 15th.

The IRS has also relaxed some of their enforcement efforts during this interim period. If you happen to have an outstanding balance with the IRS that you are paying off through an installment agreement, payments due between April 1, 2020 and July 15th, 2020 are suspended. Any outstanding Offers in Compromise will not be closed before July 15th, 2020.

And collection activity has been suspended through July 15th, 2020. This involves

Liens and levies from Revenue Officers,
Liens and levies from the Automated Collection System,
Passport certification to the State Department,
Assignment of delinquent tax accounts to private debt collection agencies.

The IRS may continue the examination of some tax returns during this period if there is a likelihood that the Taxpayer they are examining has the capacity to start the examination in order to protect the Statute of Limitations from expiring. However, new field, office and correspondence audits are unlikely to begin until after July 15th. IRS Appeals functions will continue as normal.

In addition to the filing deadline for 2019, as well as the leniency in terms of IRS enforcement during this period, legislators in the US have passed some laws focused on alleviating some of the burdens that businesses are dealing with as it relates to the economic slowdown brought about by the Coronavirus pandemic.

The Family First Coronavirus Response Act (FFCRA) includes refundable tax credits available to businesses and self-employed individuals for qualified sick leave wages and qualified family leave wages. The calculation of these credits can be quite complicated and might not apply to anyone that doesn’t own a US corporation that offers sick and family leave pay to their employees. For anyone that this tax benefit might apply to, you might want to consult with a US licensed attorney who specializes in labor law to make sure your sick leave and family leave policies can qualify for this particular tax credit. To get these refundable tax credits, an employer or self-employed individual must provide paid sick leave for an employee who is unable to work or telework because:

The employee is subject to federal, state or local isolation orders related to the Coronavirus outbreak,
A health-care practitioner advised the employee to self-quarantine from concerns about Coronavirus,
The employee experiences symptoms of Coronavirus and sought an actual diagnosis,
The employee is caring for an individual subject to an order described in the first two clauses listed above,
The employee is caring for the employee’s son or daughter whose school is closed, or the childcare provider is unavailable because of Coronavirus precautions, or
The employee experiences other substantial similar conditions to be determined.

The IRS will be releasing documentation requirements to qualify for the credits listed above.

Another law that was recently passed in the US to prevent or minimize the adverse impact caused by the economic ramifications of the Coronavirus outbreak is the Coronavirus Aid, Relief and Economic Security (CARES) Act. This legislation includes several emergency assistance measures to help small businesses. In addition to the issuance of Small Business Administration Loans to help small to medium sized enterprises make payroll and health insurance premium payments during this time period, the CARES Act includes several tax incentives.

To mitigate the rise of unemployment that will result from the economic slowdown caused by Coronavirus, the CARES Act includes an Employee Retention Tax Credit. This particular tax credit offers all eligible employers a 50% credit on qualified wages paid against employment taxes in a quarter. There is a maximum credit of $10,000 per employee for the year of 2020 that is creditable, which includes the health benefits that are paid on an employee’s behalf. Tax-exempt organizations are also able to take this tax credit. Employers are eligible for this credit if:

Their operations were fully or partially suspended during a quarter because of a government order,
Their gross revenue for a quarter is less than 50% of their gross revenue from the same quarter of the prior year, and
They have not received an SBA Small Business Interruption Loan.

The creditable qualified wages must be paid or incurred after March 12th, 2020 and before January 1st, 2021. If the employer has more than 100 employees, they will receive the credit for the wages paid to employees while they are not providing services because of Coronavirus related issues. For employers with 100 or fewer employees, all of employee wages paid throughout this time period qualify for the credit, regardless if the employer is open for business or forced to close.

To help free up the operational cash flow of businesses impacted by the Coronavirus outbreak; the CARES Act also includes a Payroll Tax Payment Delay. The payment delay applies to 100% of employer payroll taxes incurred between March 27th, 2020 and January 1st, 2021. 50% of the employer payroll taxes incurred during this time period are due by December 31st, 2021 and the remaining 50% payment are due on December 31st, 2022. Similar deferral rules can be applied to self-employment taxes, however this payment delay is not available for any employer or self-employed individual who applies for SBA loan forgiveness under the CARES Act.

The CARES Act also modifies 80% Net Operating Loss (NOL) limitations of taxable income for 2018, 2019 and 2020. NOLs incurred in this time period can be carried back 5 years. The CARES Act retroactively removes the excess loss limitation for 2018, 2019 and 2020. The CARES Act accelerates the corporate minimum tax credit for prior year minimum tax to be fully used for 2019 instead of 2021.

The Tax Cuts and Jobs Act that went into effect January 1st, 2018 limited the interest expense deduction to 30% of a corporation’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The CARES Act increases the interest expense limitation to 50% for years 2019 and 2020, however this is only available for corporations, not partnerships. For business that utilize assets that can be classified as qualified improvement property (QIP), the depreciation schedule is reduced to 15 years from 39 years. QIP is now also available for bonus depreciation. This can be very helpful for businesses such as hotels and restaurants that are shutdown during this time.

Additionally, the CARES Act also included some excise tax exemptions for producers of hand sanitizer that use alcohol and for air transportation for the remainder of 2020.

Since the outbreak of the Coronavirus has been declared a federal disaster under the Stafford Act, one particular provision of the tax code that has been part of the US tax code since the terrorist attacks of September 11th that could be applicable to the Coronavirus economic slowdown is IRC § 139. This tax provision enables an employer to provide qualified disaster relief payments to an employee that are tax-deductible to the employer yet are excludable from income and payroll tax to the employee. Qualified disaster relief payments are:

Necessary personal, family, living, or funeral expenses incurred as a result of a federal disaster, and
Reasonable and necessary expenses incurred to repair or rehabilitate a personal residence that is attributable to a federal disaster.

Furthermore, the qualifying disaster relief payment are made by:

A person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a federal disaster, and
Federal, state or local government, or agency or instrumentality payments in connection with a federal disaster in order to promote the general welfare.

Businesses can take advantage of this particular provision of the tax law if they provide Coronanvirus cash grants to their employees to be able to pay for:

Unreimbursed medical expenses.
Childcare expenses,
Teleworkng costs, and
Other unusual and unexpected expenses related to this public health crisis.

The CARES Act also includes several provisions in the tax code for individuals to take advantage of. In order to access emergency funds from US Taxpayers’ retirement accounts, the CARES Act stipulated that US Individual Taxpayers can receive a Coronavirus related distribution from their retirement accounts of up to $100,000, regardless of their age, which will be free of the 10% early withdrawal penalty. If the US Taxpayer accepts the IRA Rollover rules, they can pay the Coronavirus related retirement distribution back to their retirement account over a three-year period starting from the day of distribution without being subject to excess contribution penalties. If the US Taxpayer would like to keep the Coronavirus related distribution, they have the option to spread out the reporting of the income in equal amounts throughout their 2020, 2021 and 2022 tax returns. Furthermore, if a US Taxpayer would like to take out a loan from an employer-sponsored retirement plan, such as a 401k plan, the maximum loan amount has been increased from $50,000 to $100,000. And retired US Taxpayers that have a Required Minimum Distribution requirement from their IRA accounts do not have to take the Required Minimum Distribution for 2020 without incurring any penalties if they choose not to.

To qualify for this one-time tax benefit, a Coronavirus-related retirement distribution is defined as distribution made between January 1st, 2020 and December 31st, 2020 to an individual who fits the following criteria:

An individual, an individual’s spouse or an individual’s dependent who is diagnosed with Covid-19 from a CDC approved test, or
An individual who experiences adverse financial consequences due to the Covid-19 outbreak that results in quarantine, furlough, lay off or a significant reduction in work hours, inability to work due to lack of childcare, or the closing or decrease in opening hours from a business owned by the Taxpayer.

There is a possibility that the IRS may add more factors to these criteria as more information about the Coronavirus and its economic impact becomes apparent.

One aspect of the Tax Cuts and Jobs Act that has significantly changed the behavior of Taxpayers is the increase in the Standard Deduction for every filing status. This has led to many taxpayers no longer itemizing their deductions, which has in effect deterred many taxpayers from making charitable contributions which were tax deductible prior to 2018. The CARES Act adds a maximum $300 adjustment to income deduction for US Taxpayers who take the Standard Deduction. This is a permanent change and is applicable to all tax years after December 31, 2019.

Additionally. US Taxpayers can exclude from gross income up to $5,250 that they receive from their employer to pay for the principal or interest on a student loan. US Taxpayers who take advantage of this tax benefit may not also use the student loan interest deduction.

The topic that is going to be of most interest to US citizens residing inside and outside the US is the financial economic impact payments that the majority of US citizens are entitled to. The CARES Act includes a $1,200 refundable tax credit to each US citizen who’s Adjusted Gross Income (AGI) on their 2018 or 2019 income tax returns do not exceed the following levels:

Single – $75,000
Married Filing Jointly – $150,000
Head of Household – $112,500

If your income on your 2018 or 2019 tax return exceeds the minimum amount, the credit will be reduced by 5% of AGI over the base amounts until phased out. However, if you don’t qualify for the economic impact payment because your income for 2018 or 2019 exceeds the phase out amount, yet your income for 2020 is reduced because of a significant slowdown in economic activity, you do have a chance to get the credit when you file your Form 1040 for 2020 in 2021. If your refundable credit is reduced, you will get the remainder of the credit with your 2020 tax return. If your income for 2020 increases from 2018 or 2019 to a level that would phase out the refundable credit, you’re not required to pay back the credit with your 2020 tax return. Additionally, for Taxpayers that have dependents that qualify for the Child Tax Credit, you will get an additional $500 for each qualifying child under the age of 17 on your tax return.

The income level will be evaluated by your 2018 Form 1040 for taxpayers who have not filed with 2019 Form 1040 as of yet. If you qualify for the economic impact payment based on your 2018 income, yet your 2019 income exceeds the phase out amount, it might be a good idea to postpone filing your 2019 tax return until after you receive the economic impact payment, particularly since Tax Day was extended until July 15th.

There’s a couple more issues that should be addressed regarding the economic impact payments. First, the economic impact payments will not be reduced for Taxpayers that owe back taxes or have defaulted on their student loans. As of now, the only federal debt that will block an economic impact payment from going to a Taxpayer is delinquent child support payments. Second, retired US citizens that only receive Social Security and don’t have a US tax return filing requirement should receive the economic impact payment without having to file a tax return. Third, the income levels are just based on a Taxpayer’s AGI. As of the date of this writing, there doesn’t seem to be any indication that a US Taxpayer residing outside the US who uses the Foreign Earned Income Exclusion will have their income level adjusted for the excluded amount. Fourth, this economic impact payment is only available to US citizens or permanent residents with a valid Social Security Number. Non-Resident Aliens with an Individual Tax ID Number will not qualify for the economic impact payment.

For US citizens that didn’t have a US Tax Return filing requirement for 2018 or 2019, they can choose to have the economic impact payment direct deposited into their US bank account. They can do so by registering on this IRS webpage, and providing the necessary information that the IRS requests.

For Taxpayers who did not receive a refund that was direct deposited into their US bank account from their 2018 or 2019 tax returns, they can update their US bank account information on the IRS web portal once it’s released. Please check this webpage frequently until the web portal is available if you fit this criteria.

For US Taxpayers that reside outside of the US and don’t have a US bank account, please make sure that you can access the mail with the address you use on your Form 1040, as that is where your economic impact payment will be mailed to.

Matthew Stevens EA is the Managing Director at Global US Tax Plan Ltd. He may be reached at matthew@globalustaxplan.com