The Coronavirus Pandemic and federal tax updates
April 27, 2020
By Miranda L. Aavatsmark, CPA
In February of this year, Punxsutawney Phil did not see his shadow and predicted an early spring instead of six more weeks of winter. A little over a month later, on March 20, 2020, Steve Mnuchin saw his shadow and did a double take. He announced that there would be twelve more weeks of tax season! A few days before this though, Mnuchin declared an extension of time to pay taxes until July 15, 2020. He casually made the comment to “go ahead and file your tax return” without realizing the implications for taxpayers and CPAs. With many tax professionals working remotely during an already busy time, this would be a nearly impossible feat. Tax professionals from all over pushed back at this with resounding unity and, thankfully, it did not take long for the time to file to also be extended. Another twelve weeks of tax season is as unprecedented as everything else going on in the world today, so let’s begin with some of the changes to the tax deadlines that have come about as a result of the Coronavirus Pandemic.
Federal tax deadlines
As I mentioned above, Secretary Mnuchin initially announced an extension to pay up to $1M for individuals and $10M for corporations until July 15, 2020. However, when the extension of time to file was implemented, the limits on the amount of tax fell by the wayside. The extension of time to file and pay federal taxes are automatic for all applicable taxpayers per Internal Revenue Notice 2020-58. Subsequent to the release of this notice, the Internal Revenue Service (IRS) continues to expand the relief to additional taxpayers and provide more guidance. On April 9, 2020, the IRS announced in Notice 2020-23 that the July 15, 2020, extension now applies to generally all taxpayers with a filing deadline falling on or after April 1, 2020 and before July 15, 2020. Below are some important notes about the deadline that the IRS has clarified:
- 1040, 1041, 1065, 1120, 8960, and 8991 series forms are all extended until July 15, 2020
- Fiscal year filers of the above forms with a due date between April 1, 2020 and July 15, 2020 are extended until July 15, 2020, even if the due date was previously extended
- First quarter estimates for individuals and corporations are not due until July 15, 2020; however, the second quarter estimates are also extended to July 15, 2020 per Notice 2020-23
- Likewise, the extension applies to retirement and IRA contributions, as well as Health Savings Accounts and Medical Savings Accounts contributions
- Existing Installment Agreements due between April 1, 2020 and July 15, 2020 may be suspended but continue to accrue interest
- If taxpayers are not able to file their returns by the July 15, 2020 deadline, an extension until October 15, 2020 can be filed. Note that late payment penalties and interest will apply if the tax liability is not paid by July 15, 2020
- The time to file a 2016 amended return was also extended under Notice 2020-23 to July 15, 2020
- Form 709, United States Gift and Generation-Skipping Transfer Tax Returns, are extended until July 15, 2020, under Notice 2020-20
- Form 706, Estate and Generation-Skipping Transfer Tax Payments and Return Filings, are extended until July 15, 2020 under Notice 2020-23
- Forms 990, 990-T, 990-EZ, 990-N, and 990-PF that are due on or before April 1, 2020 and July 15, 2020 are extended to July 15, 2020
- Payroll and excise taxes are not extended under this provision
- All other affected taxpayers with a deadline between April 1, 2020 and July 15, 2020 are automatically extended (see Notice 2020-23 for more details)
- Specified time sensitive actions such as tax court filings and ongoing examinations are also provided additional time (see Notice 2020-23 for more details)
State, local and other returns
The federal extended deadline does not cover any other agency deadlines. Therefore, consideration would need to be given to the due dates of state, local and other returns, including estimated tax payments.
On behalf of Kentucky tax professionals and taxpayers, the leadership and staff with The Kentucky Society of CPAs persuaded Kentucky legislators and revenue officials to adopt the revised federal deadlines. As a result of KyCPA’s advocacy, Kentucky extended the filing and payment deadline to July 15, 2020. The income tax relief is applicable to individual, corporate, limited liability, fiduciary and pass-through filers with filing and payment deadlines of April 15, 2020. The deadline to file Tangible Personal Property Tax Returns was also extended from May 15, 2020 to July 15, 2020. Likewise, at the extensive urging of KyCPA, The General Assembly passed a bill to abate interest that was previously not legal to waive.
Even though the hope is that other agencies and states will follow the federal deadlines, tax professionals should verify this with each locality before their normal filing deadlines. Nonetheless, the AICPA has been compiling and updating a listing of all state filing due dates which can be found in this link with the latest information.
The Kentucky Society of CPAs has also been compiling a list of all of the localities in Kentucky, which can be found here.
The Coronavirus Aid, Relief and Economic Security (CARES) Act
Starting in January of 2020, CPAs were going into their third year of familiarity with the new tax laws brought about with the Tax Cuts and Jobs Act of 2017 (TCJA). They finally began feeling confident in their understanding of the changes as well as overcoming software glitches. Nevertheless, the CARES Act, signed into law March 27, 2020, reversed some of the TCJA laws, at least temporarily, in addition to adding some brand new items. Although there are many significant sections in the CARES Act, including taxpayer favorable loans for sustaining payroll and other business expenses, the main focus of this article is the federal tax provisions that will impact many taxpayers and businesses in the coming months and years. With that, we will begin with the most popular NEW tax topic among Americans right now, the stimulus payments.
Individuals have been highly anticipating this particular section of the CARES Act for weeks, and rightfully so. With many workers laid off or without childcare, they are anxious for financial relief. The stimulus payment attempts to provide this by distributing $1,200 to individual taxpayers ($2,400 for a married couple) plus $500 for each dependent child under age 17. The amount of the payment begins to phase out above $75,000 of Adjusted Gross Income (AGI) for Single Taxpayers, $112,500 for Head of Household (HOH) and $150,000 for Married Filing Jointly (MFJ). The total stimulus payment is reduced by $5 for every $100 of income that exceeds the AGI thresholds. The payment is then completely phased out once the taxpayers’ AGI reaches $99,000 for singles, $136,500 for HOH and 198,000 for MFJ, with no eligible children.
The IRS will use taxpayers’ 2018 returns, unless the 2019 return has already been filed, to compute the stimulus payments. If the taxpayer(s) did not have a filing requirement in 2018 or 2019 but received Social Security benefits, the IRS will compute the stimulus payment using this information. Further, taxpayers that do not have a filing requirement or receive Social Security Benefits will have an opportunity to provide basic data and direct deposit information on the IRS website in order to receive their stimulus payment. Taxpayers can go to irs.gov/coronavirus/economic-impact-payments to input their information and check the status of their payment.
It is important to note that the stimulus payment is an advanced 2020 income tax credit. The stimulus payment will be computed with the filing of the 2020 federal tax return and based on 2020 income and dependents. Taxpayers whose income was too high in 2018 and 2019 to receive an advance payment, may be entitled to the credit once they file their 2020 tax return. With many individuals and businesses losing money this year due to shut downs, this might likely be the case for many Americans.
Taxpayers will be permitted to withdraw up to $100,000 of funds from their retirement accounts without being charged an additional 10 percent penalty (if applicable). In order to qualify, a “coronavirus-related distribution” must be made during 2020 by a taxpayer:
- Who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC
- Whose spouse or dependent is diagnosed with one of the two above mentioned diseases
- Who experiences adverse financial consequences as a result of being quarantined, laid off from work or being unable to work due to lack of childcare
Although the Act does not waive income taxes on distributions, taxpayers are permitted to spread the income tax over a three-year period beginning with the 2020 tax year. Taxpayers may also repay the distribution within three years of receiving the funds and avoid paying income tax on the distribution.
Individuals can also borrow up to $100,000 or 100 percent from their retirement account (an increase from $50,000/50 percent) during the 180 day period after the enactment of the CARES Act into law. Additionally, prior outstanding loans that are due to be repaid between the day the Act was enacted and December 31, 2020, are delayed one year.
The CARES Act also waives the “required minimum distribution” from retirement accounts in 2020 only.
The enactment of the TCJA doubled the standard deduction and limited the state and local tax deduction to $10,000, causing a vast majority of taxpayers to no longer itemize. Starting with 2020 and future tax years, the CARES Act allows a $300 “above the line” deduction for donations to approved charitable organizations for taxpayers who do not itemize.
Taxpayers who are eligible to itemize will be allowed to deduct charitable contributions up to 100 percent of their AGI. The new law also raises the allowed charitable donations of a corporation from 10 percent of adjusted taxable income to 25 percent. Both of these increases are for the 2020 tax year only.
Employer paid student loan debt
Section 127 of the IRC allows employers to exclude from wages up to $5,250 of educational assistance paid on behalf of their employees. The CARES Act adds student loan debt payments paid before January 1, 2021 to this exclusion. Note that the total payments (for education and/or loans) cannot exceed $5,250 without being included in the employees W2 wages.
Employee Retention Credit (ERC)
This newly created credit is designed to encourage employers to retain their employees and maintain salaries through the end of 2020. In the simplest terms, the credit is equal to 50 percent of qualified wages for any quarter in 2020, starting March 12, that a business was fully or partially suspended due to the Coronavirus. The credit is taken against the employer’s share of Social Security taxes, which are first reduced by sick leave and FMLA credits, if applicable.
If the employer employs fewer than 100 employees, then all wages paid to employees during the suspension period(s) are eligible for the credit. Employers with 100 or more employees can only take the credit for continuing to pay wages to employees who are not working during the business suspension. Additionally, the maximum qualified wages eligible for the credit is $10,000 per employee for all quarters.
The suspension period is any quarter during 2020 that the operations of a business are fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to the coronavirus disease 2019 or due to a significant decline in gross receipts.
A significant decline in gross receipts occurs when a business’s gross receipts declined to less than 50 percent of gross receipts for the same time period in the prior year. The suspension period ends in the quarter when gross receipts increase to greater than 80 percent of gross receipts in the same time period in the prior year.
Employers who secure a payroll protection loan are not eligible to take the payroll tax credits.
Payroll tax deferral
After applicable payroll tax credits for sick leave, FMLA and ERC have been applied, net payroll taxes can be deferred for two years, interest and penalty free. The employer’s share of Social Security taxes (6.2 percent) incurred between the date the CARES Act was enacted and December 31, 2020 can be paid in two equal installments on December 31, 2021 and December 31, 2022.
Self-employed individuals are also eligible to defer half of their self-employment tax until 2021 and 2022.
Similar to the payroll tax credits, the payroll tax deferral is not available to taxpayers who receive a payroll protection loan. The IRS’s frequently asked questions notes that there is an exception, however, for payroll taxes incurred by the taxpayer prior to the date they received confirmation their loan was forgiven. In this instance, payroll taxes that would have been required to be paid by March 27, 2020 through the date which the loan was forgiven would still be eligible for the deferral. Payroll taxes paid through the remainder of the year, after the loan is forgiven, would not be eligible for the deferral.
Net operating losses
The TCJA permanently eliminated taxpayers’ ability to carryback net operating losses, and limited carryforwards to offset only 80 percent of future taxable income. Nonetheless, U.S. tax laws are only permanent until lawmakers decide to change them. The CARES Act brings this taxpayer friendly tax law back to life, at least temporarily. Starting with losses incurred in 2018, individuals and corporations can carryback net operating losses five years to claim refunds. For losses that are carried forward to 2019 and 2020, the previous rules of offsetting 100 percent of taxable income also revert back.
Excess business losses
On the subject of losses, Internal Revenue Code (IRC) §461 is temporarily nixed from the tax law for 2018, 2019 and 2020. Taxpayers may amend their 2018 and 2019 returns if losses were disallowed by this TCJA limitation. However, starting with the 2021 tax year, wages will no longer be considered business income, which may limit more losses than would have previously been limited. Keep in mind, the excess business loss limitation is one of the temporary TCJA changes that is scheduled to sunset after December 31, 2025.
Corporate alternative minimum tax credits
Corporate alternative minimum taxes (AMT) were permanently struck from the tax code when TCJA was passed at the end of 2017. And although TCJA was very partisan, this elimination was widely accepted across the board due to the unpopularity of AMT. Nonetheless, corporations that previously paid AMT in tax years prior to 2018 could claim minimum tax credits before 2021, with any unused credits fully refundable in 2021. The CARES Act modifies these dates by accelerating the refundable credits to 2019. There is also an election to take the entire remaining credits on the 2018 return, but this may require an amended return to be filed.
Business interest limitation
IRC §163(j) is one of the more complicated new TCJA tax laws with many caveats and trap doors that accountants have been navigating for a couple of years. The CARES Act updates a few of the rules related to this limitation to provide businesses with more deductions. First, the business interest limitation of 30 percent of adjusted taxable income was increased to 50 percent for 2019 and 2020. Businesses can also use their 2019 income to compute their 2020 adjusted taxable income (since many businesses will likely have losses or significantly less profit). In keeping with the spirit of complication, partnerships are not eligible for the 50 percent limitation in 2019. Instead, 50 percent of disallowed interest expense passed out to partners will be fully deductible in 2020, with the other 50 percent remaining suspended until excess taxable income is allocated to them in the future.
Qualified Improvement Property fix
A mistake in the hastily passed TCJA resulted in Qualified Improvement Property (QIP) not being assigned a 15 year life. As a result, QIP had to be depreciated over 27.5 years for residential rental property and 39 years for commercial property, and was therefore not eligible for bonus depreciation. A technical correction would be required to make this adjustment; prior to the recent bipartisan unity in the House and Senate, it was not likely going to happen in the near future. The CARES Act corrected the drafting error by assigning QIP a 15 year life. This was a welcome revision that accountants are likely celebrating across the country. In addition, the assignment of the 15 year life to QIP is retroactive to January 1, 2018, which may mean even more returns can be amended to take advantage of this update.
Putting it all together
Besides the tax law changes summarized above, accountants will have their hands full for months and years to come helping clients with all that the CARES Act provides. There are a myriad of options available to taxpayers to keep their businesses afloat and retain valued employees. Although an early spring is not as enjoyable cooped up in their home offices, accountants are resilient and adaptable to change in times of crisis. The tax community will no doubt play a huge role in helping taxpayers salvage their businesses and livelihood through these difficult times. So, for the next twelve weeks, accountants will make the best of tax season 2.0 by preparing droves of amended returns, waiting patiently for software updates, and likely canceling their fourth of July plans.
About the author: Miranda L. Aavatsmark, CPA, is a tax manager of Blue & Co., LLC in Lexington. She can be reached at firstname.lastname@example.org.