Tax Relief to Help Weather the Storm of COVID-19
As the COVID-19 pandemic has wreaked havoc on our personal, financial and business lives, the government has responded with legislative and administrative relief.1 This is a high-level summary of some of the enacted measures and the tax benefits, relief and other options available to individuals and businesses.2
1. Individuals Receiving Cash.
These funds are a rebate against a refundable tax credit that may be claimed on an individual’s 2020 tax return. The rebates are generally being paid to single individuals having Adjusted Gross Income (AGI) up to $75,000 ($1,200 rebate), persons who file as head of household with AGI up to $112,500 ($1,200 rebate), and joint filers with AGI up to $150,000 ($2,400 rebate). 3 The rebates are treated as any other refundable tax credit, and are not income to the recipient. The rebates are based on 2019 income, but are really an advance against a tax credit for 2020. If a taxpayer’s AGI in 2020 is less than it was in 2019, for example as a result of becoming unemployed because of the coronavirus crisis, any additional unused credit for 2020 will be refunded or reduce taxes for 2020. If the actual credit amount calculated based on 2020 income is less than the amount of the rebate that was advanced, the recipient does not have to pay it back.
2. Cash Charitable Deductions.
The CARES Act increases cash charitable deductions made to public charities by individuals in 2020 from 60% to 100% of AGI. If the taxpayer does not itemize deductions, there is an above the line deduction of up to $300 for cash contributions to public charities in 2020.
3. Contributions to IRAs.
The deadline for making contributions to a traditional or Roth IRA for 2019 has been extended to July 15, 2020.
4. Withdrawing Retirement Funds.
- Distributions. Normally, withdrawing funds from a retirement account such as an IRA or 401(k), creates an early withdrawal penalty of 10%. However, if funds are withdrawn in 2020 due to COVID-19 there is no penalty and generally the taxes can be paid on the withdrawal over 3 years. The COVID definition is limited and includes “if you or your spouse or dependent are diagnosed with COVID-19 or you have experienced adverse financial consequences resulting from the virus.” If the funds are repaid to the retirement account within 3 years of the withdrawal, this will be treated as a tax-free rollover. Due to the economic impact of the virus, withdrawal of assets may be at a reduced value and will not have the potential upside of future market recovery in a tax deferred vehicle. Look to other alternatives, such as creditor workouts and taking out loans, such as the PPP loans. However, as discussed below, PPP loans have only been available to businesses and independent contractors, and not to individuals.
- Loans from Retirement Accounts. As an alternative to taking distributions from a retirement plan that allows loans, a participant with coronavirus issues as described above, may borrow the lesser of $100,000 or 100% of their vested account balance during the period of March 27, 2020 through September 22, 2020. The repayment period for a loan from a qualified plan is 5 years. However, for existing plan loans that are due from March 27, 2020 through December 31, 2020, payment can be extended for one year.
5. Waiver of Required Minimum Distribution (RMD).
The requirement to make RMDs is waived for certain qualified retirement plans and IRAs for calendar year 2020. This also includes RMDs that were due to be paid by April 1, 2020 for an account owner who turned 70 ½ in 2019.4
6. Student Loan Repayments by Employers.
An employer may pay up to $5,250 of an employee’s student loans as a tax free benefit to the employee for payments made after March 27, 2020 and before January 1, 2021.5 The payment can be made to the lender or to the employee, but if paid to the employee, there is no interest deduction allowed for the employee. These payments are excluded from the employer’s income. These payments to the employee are not considered part of the employee’s payroll.
7. Extended Filing Deadlines.
The filing date for income tax returns for individuals, trusts, estates, those who pay self-employment tax and other non-corporate taxpayers has been automatically extended from April 15, 2020 to July 15, 2020, without penalties or interest.6 If additional time is needed, requests for extensions can be filed. The IRS is urging those who will be getting refunds to file as soon as possible. The due date for filing gift tax returns and paying gift tax or generation skipping tax has also been extended form April 15, 2020 to July 15, 2020.
8. Amending Business Tax Returns.
The CARES Act retroactively modifies certain provisions of the Tax Cuts and Jobs Act (TCJA), which was passed December 20, 2017. Amending returns for the applicable periods can immediately increase much needed cash flow for many businesses.7
- Net Operating Losses (NOLs). TCJA limited the carry back of losses. For losses incurred in 2018, 2019 or 2020, businesses can now carry back the losses for 5 years. The NOL carry back is increased to 100% of taxable income, rather than the 80% limitation in the TCJA.
- Qualified Improvement Property (QIP). QIP is defined as improvements to an interior portion to a non-residential building, which is placed in service after the building was first placed in service. Starting for QIP placed in service after 2017, the CARES Act changes QIP property from 39-year property to 15-year property for depreciation purposes.
- Excess Business Loss Limitation. The CARES Act automatically shuts off the excess business loss limitation for non-corporate taxpayers for 2018, 2019, and 2020. If subject to the limitation, a return can be amended. The taxpayer may be entitled to a refund or it may create a NOL, which can be carried back as explained above.
- Minimum Tax Credit for Corporations. The corporate Alternative Minimum Tax (AMT) was repealed by TCJA. Some AMT credits were limited, but could still be claimed under TCJA. The CARES Act allows corporations to take these credits as fully refundable credits for 2019, with an election to accelerate refunds for 2018 credits.
9. Increased Charitable Deductions for Businesses.
The charitable deduction for C Corporations is increased from 10% to 25% of taxable income. The limitation for charitable deductions for contribution of food inventory is increased form 15% to 25% of taxable income for business taxpayers, including C Corporations.
10. Employee Retention Credit.
Qualified employers are entitled to a payroll tax credit of 50% paid for eligible employees during the COVID-19 crisis. To qualify, the business operations of the employer are required to be fully or partially suspended due to a shut-down order, and gross receipts of the employer declined by more than 50% during a quarter, when compared to the same quarter for the prior year. The credit depends on the number of employees, and is limited to the first $10,000 of compensation, including health benefits paid to an eligible employee after March 12, 2020 and before January 1, 2021.
11. PPP Loans and EID Loans
There are many articles covering the complexities of qualification for PPP loans and forgiveness of PPP loans to the extent the proceeds are used for qualified expenses.
- PPP Loans. Generally for PPP loans, if payroll is not reduced, or if it is, is restored after the crisis, all or a significant amount of the loan will be forgiven by the government. PPP loans were made available to (i) business that has less than 500 employees, (ii) 501(c)(s) charities that have less than 500 employees and (iii) to certain sole proprietors and independent contractors who operate a trade or business. In order to be forgivable, the loan proceeds must be used within 8 weeks of receipt of the funds by the business for payroll costs, mortgage interest, rent, utilities, and additional wages to employees who receive tips. Normally, loan forgiveness under general tax rules is taxable as income to the borrower. The largest benefits of this program are that the forgiveness of the loan for qualified uses is tax free. Businesses receiving PPP loans are not eligible for the employee retention credit.
- EID Loans. The EID loan program provides certain small businesses with loans up to $2 million and is available for economic loss due to the coronavirus. This is not a new program. However, under the CARES ACT, eligible small business owners are eligible to apply for an advance of $10,000 under this program that does not have to be repaid.
12. Disaster Relief Payments.
An employer can establish a disaster relief fund for employees who have incurred financial losses as a result of the COVID-19 crisis under IRC Sec. 139. The employer obtains a deduction, and the employee receives tax free benefits.9 The pandemic was declared a major disaster qualifying for relief under the Stafford Act by President Trump on March 13, 2020. The types of expenses that can be covered under the Stafford Act include reimbursement for reasonable and necessary personal living expenses and funeral expenses, provided these expenses are not covered by insurance or otherwise reimbursed. Sick leave and family leave are not considered expenses covered under the Stafford Act. However, child care expenses resulting from school closings and expenses allowing employees to work from home should be covered. An employer needs to adopt a plan that qualifies for this treatment that lists the types of expenses that will be covered.
There are many different programs and relief available. It is important to note that the definition of “COVID-19 related” is fairly narrow and may change from program to program. To provide some of these opportunities to their employees, employers will need to amend retirement plans and create additional benefit plans. The rules are complex and agencies are just beginning to create guidance for tax, legal and business professionals.
About the Author: Beth S. Cohn is a shareholder at the Phoenix law firm of Jaburg Wilk. She chairs the business law department and assists clients with estate plans, business transctions and business planning. She is a State Bar of Arizona certified tax specialist and a CPA.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2010.
This Article generally does not cover certain issues that have been addressed by other attorneys at Jaburg Wilk, which are included on the Jaburg Wilk webpage under “Covid-19 Legal Resources”.
Taxpayers who have eligible dependents are entitled to an additional $500 per dependent child, generally up to age 17. The amount of the rebates is subject to phase out of $5 for each $100 a taxpayer’s income exceeds the applicable AGI amount. Special rules apply for seniors with income only from Social Security and veterans with income only from a veteran’s disability payment, as long as they are not the dependent of another person. Special rules also apply to a full time college students under age 24, depending on whether or not they are a dependent of their parents.
The age for taking RMD was increased to age 72, if you reach age 70 ½ in 2020 or later under the Secure Act.
This benefit also applies to the payment of educational assistance, such as tuition, fees and books
This rule also applies to certain fiscal year corporations.
This Article does not address the relief given for the business interest expense limitation, since the threshold for the application of these rules does not apply to many small businesses.
A detailed discussion of Paycheck Protection Program (PPP) loans and Economic Injury Disaster (EID) Loans and the qualification requirements is beyond the scope of this Article. Although the first round of government funding of the PPP loans has been completed, if additional funding is approved, there may be more funds available for additional loans. For more information go to www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan -resources.
The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) was enacted in response to the September 11th attacks to provide a mechanism for employers to provide disaster relief to employees.