We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19 (commonly referred to as the Coronavirus).
I apologize for sending a second newsletter out to you but the new law changes need to be addressed, and addressed immediately. Below is update on the income (and a few payroll) tax-related provisions as of this writing in the AM on 04-01-2020. Note this may change in the future.
Most is just “For Your Information” stuff for now. However, some require action steps, particularly if
1. Your business has employees, talk to your payroll processor and attorney about new federal Covid-19 leave mandates called the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. Work with your attorney and payroll processor to see whether you need to comply and inform employees and adopt the infrastructure to track the new sick and leave (see Accelerated government reimbursements to fund the new federal Covid-19 employee leave mandates section),
2. You are a retiree and do not need the retirement plan distributions, look into deferring the payouts with your financial advisor and financial institution (see the “Waiver of required distribution rules”), and
3. Your business qualifies for the employee retention payroll tax credit (see the “Employee retention payroll tax credit for employers”).
I break out the topics between the following subgroups: applicable to all, retiree only, and business income tax provisions, and business payroll provisions. I address each issue in turn.
Applicable to all
Delayed federal and most state delayed tax filing from 4-15-2020 to 7-15-2020. Many out of state customers in AZ, CA, NC, NY, and OR should know tax season has also been deferred until 7-15-2020 for almost everything. Some states like Illinois deferred the final 2019 tax payment but did not defer the quarter 1 2020 estimated tax payment which is still due 4-15-2020. Also as of this writing, most of the 2nd quarter estimated tax payment are still due 7-15-2020. Please copy and paste the following link to your browser to check for updates at https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf.
Should you have refunds, you should still file early. Those refund issuances should not be delayed!
Recovery rebates for individuals. To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit). Rebates are gradually phased out, at a rate of 5% of the individual's adjusted gross income between these ranges
$75,000 to $99,000 for individual taxpayers
$150,000 to $198,000 for couples filing joint tax returns
$112,500 to $146,500 for heads of household
Anyone below the bottom range has no phase out and gets paid the full amount. Anyone above the range gets nothing. The rebates are not available to nonresident aliens, estates, trusts, or to individuals who themselves could be claimed as dependents.
Individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, still qualify for a rebate. The rebates will be paid via check or direct deposit. Most won't have to take any action to receive a rebate. IRS computes the rebate based on a taxpayer's tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 or 2019 return has been filed, IRS uses the 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement, issued to them.
ALERT: Watch out for scammers impersonating IRS and threatening stimulus payment delays to obtain your personal information! The IRS does not generally contact someone by phone or email unless contacting you by mail first. And by the way... they will already have your social security number and date of birth!
Waiver of 10% early distribution penalty. My financial inclinations would say do not touch your retirement accounts if it is at all avoidable. Nevertheless, the additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person (or whose family is) infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
Charitable deduction liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions: (1) Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction. This will be automatically be done by us when we file your returns. (2) The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn't apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required. (3) Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required. (4) For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.
Break for nonprescription medical products. For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.
Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70 1/2 in 2019.
This waiver of required minimum distributions for 2020 is absolutely a huge deal for retirees who do not need the money!!! You need to stop the payments sooner rather than later because one generally cannot revoke a distribution already taken! It may also permit more planning opportunities such as traditional to Roth IRA conversions, especially if the stock portfolio has dropped! Please seek us out on this matter!
Business income tax provisions
Here are some excerpts of the law most applicable to my customer sizes and involvements:
Freeing Net Operating Loss (NOL) deductions. The 2017 Tax Cuts and Jobs Act (TCJA) limited NOLs to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.
The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.
Deferring the 2017 TCJA $250,000/$500,000 active trade or business loss limitations imposed on individuals until 2021. The CARES Act retroactively turns off the excess active business loss limitation rule of the 2017 TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 rather than December 31, 2017. In other words, the law retroactively removed the loss limitations to an effective date of tax year 2021 instead of 2020. Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) were disallowed by the 2017 Tax Law and needed to be carried forward in the following tax year.
Restoration of faster write-offs for interior building improvements. This change is a big deal for my small business tenants who made leasehold improvements in the past couple of years. The 2017 TCJA contained an error that forced leasehold improvements to be depreciated over 39 rather than over a much shorter life. The CARES Act fixed this error by retroactively treating (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 TCJA restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.
Certain SBA loan debt forgiveness isn't taxable. Amounts of Small Business Administration Paycheck Protection program loans aren't taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes (generally payroll, rent, and utilities) and certain employment goals are met. Seek out your banker about these loans. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.
Delayed payment of employer payroll taxes and certain state sales taxes (depends upon the state). I absolutely HATE this idea because should a business spend these payroll and sales taxes, the business owner could be held personally liable (at least under the law as of this writing)! From a practical view, I do not suspect many payroll services will go along with not collecting and remitting the payroll taxes as well because then they could become at risk. While this Coronavirus pandemic is an unprecedented time, there are cases of other tax deferrals where the government went after the taxpayer when the deferral period passed, and imposed the penalties and such for the period day one after the deferral. I advise strongly to forget this deferral option and pay your payroll and sales taxes when due. But please see the earlier section called "Employee retention payroll tax credit for employers" and the next section about "Accelerated government reimbursements to fund the new federal Covid-19 employee leave mandates" which offers credits to the payroll taxes. Credits are like cash and remove the liability!
Business payroll provisions
As you will read about the payroll provisions, you will note most won’t involve income taxes directly.
Employee retention payroll tax credit for employers. Eligible employers can qualify for a refundable credit against, generally, the employer's 6.2% portion of the Social Security payroll tax for 50% of certain wages (below) paid to employees during the COVID-19 crisis. The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.
For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven't been prevented from providing services. For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren't providing services because of the business suspension or reduction in gross receipts described above.
The credit is provided for wages and compensation, including health benefits, for the first $10,000 in eligible compensation paid. Thus, the credit is a maximum $5,000 per employee. Wages don't include (1) wages taken into account for purposes of the payroll credits provided under the new sick and family leave mandates, (2) wages taken into account for the employer income tax credit for paid family and medical leave under Code Sec. 45S or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit. An employer can elect to not have the credit apply on a quarter-by-quarter basis.
The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.
Your payroll service should be the default go-to on assisting in the implementation and tracking. We can assist of course with any additional questions but past experience suggests we would not be more efficient than the payroll service in these instances.
Accelerated government reimbursements to fund the new federal Covid-19 employee leave mandates
Oversimplifying, the tax law basically tries to use the payroll tax filing system to fund the payroll payouts to employees for their compensation and related health insurance benefits under new federal Covid-19 employee leave mandates.
This is a brief discussion of the law only to provide context and the issues related to whether to adopt, employee eligibility, and notifications would best be provided by your attorney and payroll processor.
These new sick and family leave mandates are called the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA) respectively. Henceforth for simplicity of this piece, I will call them the "new federal Covid-19 employee leave mandates”. These new leave mandates were established for employers but layer on top of existing employer-provided or government imposed sick and medical leave plans.
An administrative exemption for less-than-50-employee businesses that the leave mandates put the business in jeopardy which you may need to consider which has yet to be fully defined. Some commentators have speculated that if a 2 person business had a key employee and said employee needed to leave to care for a child then your business may qualify for this exclusion.
Other than that exception, new federal Covid-19 employee leave mandates generally require private employers with fewer than 500 employees to provide up to 12 weeks of paid sick time to employees who are unable to work for virus-related reasons. The credits apply only to a period beginning on a date determined by IRS and ending on December 31, 2020.
The maximum pay under the new federal sick and family leave mandates (and generally the credits) are as follows:
10 days paying their full salary up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus.
10 days paying 2/3rds of their salary up to $200 per day with a $2,000 overall limit for an employee that is a caregiver. The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either closes a school or childcare place or makes a childcare provider unavailable.
Up to 10 weeks paying 2/3rds of their salary up to $200 per day with a $10,000 overall limit for family leave an employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional 10 weeks of expanded paid family and medical leave.
The government announced a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, the Department of Labor will not bring an enforcement action against any employer for violations if the employer acted reasonably and in good faith to comply.
Substantiation for taking the federal Covid-19 leave credits. Nevertheless, the main risk to you is complying with the law on the payments. The IRS won’t permit pay outs that do not meet their substantiation tests. Examples include but are not limited to if payments are made to employees ineligible for the federal Covid leave mandate, payments exceed what is permitted under the mandate, the employee actually does not provide documentation of being sick, or the employee does not have proof of the school closure. You could be left holding the bag and paying back those credits! Best practices are timesheets or written signed employee statements along with third party documentation like doctor bills and other things.
I am not an attorney so please seek an attorney’s opinion on implementing, interactions with existing plans, compliance with other owned trade or businesses, notifying employees, etc. In addition, your payroll processor should know about these rules and (hopefully) devised the infrastructure to assist in documenting, pay outs, etc., so seek their advice next rather than waste your valuable time recreating the wheel.
Self-employed sick and family leave tax credit
Both the self-employed sick and family leave tax credits are refundable tax credits offsetting income, self-employment and net investment income taxes for sick or family leave by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick or family leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee (see the “Accelerated payment of credits for the new federal sick leave and family leave mandates” section above). As for employees mentioned above, the maximum credit is $5,110 or $2,000 for self-employed sick leave and $10,000 for self-employed family leave.
Both credit amounts are decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid family leave from an employer under the Act. The credits apply only to a period beginning on a date determined by IRS and ending on December 31, 2020.
Note this is not a carte blanche system. See the substantiation under the “Accelerated payment of credits for the new federal sick leave and family leave mandates” section above. Also, verify it meets the other general anti-discrimination rules whereby employees should have similar benefits as their employers and key employees.
There is a lot to digest here but at least you have a general sense of the changes. Please email or call me with questions about the above information or any other matters, related to COVID-19 or not. I wish all of you the very best in a difficult time and know that you are not alone... we are really all in this together!