COVID-19: Changes in Federal Tax Law You Need to Know

In response to the COVID-19 pandemic, the last few weeks have seen an unprecedented series of legislative actions by Congress, as well as a number of significant administrative actions by the Internal Revenue Service. Here is a brief synopsis of federal tax extensions and changes due to COVID-19.

Federal Filing and Payment Deadlines Extended

Initially, the IRS only offered a payment deadline extension in response to COVID-19. However, after much pressure, the IRS in response has instead provided much more comprehensive relief to mostly taxpayers in the U.S.

All taxpayers refers to: individuals, trusts, estates, (some) partnerships, associations, companies (including LLCs), corporations, nonprofits, and more that have a filing date of April 15, 2020.

  • For all taxpayers who are required to file a federal income tax return and/or submit a federal income tax payment for the 2019 tax year, due on April 15, 2020, the due date for both filing and paying is extended to July 15, 2020. This applies to all taxpayers regardless of the amount of their federal tax obligation.
  • This applies to all filers of Forms 1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS, 1041, 1041-N, 1041-QFT, 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF, 8960 and 8991.
  • For self-employed taxpayers, relief is also provided for making federal estimated income tax payments.
  • The period of April 15, 2020 through July 15, 2020 is considered disregarded for the purposes of calculation of any interest, penalty, or addition to tax for failure to file the income tax returns or pay the income tax owed. Interest, penalties and any additions of tax will begin to accrue again on July 16, 2020.
  • No extension is provided for the payment or deposit of any other type of federal tax- including federal estate and gift tax.
  • Important to note that any taxpayer returns that were due on March 16, 2020, which include Form 1065, 1065-B, Form 1066, and Form 1120-S, are not included in any of the COVID-19 extensions for both filing and payment. However, any timely filed extensions will still extend the due date six months as normal.
  • For fiscal year taxpayers, if their federal income tax return for the fiscal year ending during 2019 is due on April 15, 2020, whether that is the original due date or the extension date, the taxpayer’s filing due date is postponed to July 15, 2020.

For taxpayers that qualify for extension, no additional form is required for the July 15, 2020.  Any additional extension beyond July 15, 2020 will require filing Form 4868 as usually required.

Business Tax Credits

On March 18, 2020, President Trump signed into law the Families First Coronavirus Act which eases compliance burdens on businesses. Additional business credits were then signed into law through the Coronavirus, Aid, Relief and Economic Security Act (CARES) on March 27.

Payroll Sick Leave Credit

The Emergency Paid Sick Leave Act (EPSLA) requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to employees who are unable to work for virus-related reasons (certain exceptions may apply to less than 50-employee businesses). The pay is up to $511 per day with a $5,110 overall limit for each employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee providing care for someone with the virus.

The employer is allowed to receive a tax credit against their 6.2{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of the Social Security (OASDI) payroll tax (commonly known as the Railroad Retirement tax). This credit amount tracks to the per-employee limits described above. This credit can also be increased by both the amount of expenses in connection with a qualified health plan if the expenses are excludible from employee income, and the employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA. Any credit amounts earned in excess of the 6.2{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} Railroad Retirement tax are refundable. The credit applies to wages paid in a period beginning no later than April 2, 2020, and ending on December 31, 2020.

Self-Employed Sick Leave Credit

Self-employed persons also qualify for a sick leave credit.  The credit treats the self-employed person as both the employer and employee for credit purposes. The $5,110 and $2,000 limits as described above in EPSLA, also apply here unless the self-employed person has insufficient self-employment income based on a formula. The credit applies to wages paid in a period beginning no later than April 2, 2020, and ending on December 31, 2020.

Payroll Family Leave Credit

The Emergency Family and Medical Leave Expansion Act (EFMLEA) requires employers with fewer than 500 employees to provide both paid and unpaid leave. This leave occurs when an employee must take care of a minor child due to a COVID-19 related emergency. The first 10 days can be unpaid, but then paid leave is required, based on the employee’s pay rate and pay hours. The leave cannot exceed $200 a day or $10,000 total per employee.

The corresponding tax credit functions substantially similar to the payroll tax credit described above. The credit is against the same 6.2{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} Railroad Retirement Tax, and tracks to the $200 and $10,000 dollars employee limits described above.

Self-Employed Family Leave Credit

The Act also provided the self-employed a similar refundable income tax credit for family leave. The self-employed person is treated as both employer and employee for purposes of the credit. The credit is subject to a $10,000 limit, and may be reduced if there is insufficient self-employment income determined by formula.

Wage Exemption

Any wages paid as required sick leave payments for either EPSLA or EFMLEA are not considered wages for purposes of the employer’s 6.2{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} portion of the payroll tax, again often referred to as the Railroad Retirement Tax.

Employee Retention Credit for Employers

For eligible employers who have their operations fully or partially suspended as a result of government order, or who have experienced a greater than 50{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} reduction in quarterly receipts, measured on a year-over-year basis, the provision provides a refundable payroll tax credit for 50{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of wages to certain employees. Employers receiving Small Business Interruption Loans do not qualify for the credit. The qualifying wages depend on whether the employer has an average number of full-time employees in 2019 of 100 or fewer, if so, all employee wages are eligible.  If over 100 full-time employees, only the wages of furloughed employees or faced a reduction of hours as a result of employer’s closure or reduced gross receipts are eligible for the credit.

Other Changes in the Federal Tax Code

Recovery Rebates for Individuals

The CARES Act provides individuals with a refundable credit against income taxes they owe for the 2020 tax year equal to $1,200 ($2,400 for joint filers), not to exceed the tax liability for the year. Any taxpayer that has qualifying income (earned income, social security, and/or pension income), taxable income greater than zero, and gross income greater than the standard deduction, then the taxpayer is entitled to a refundable credit of at least $600 ($1,200 for joint filers), plus $500 per qualifying child. The phase-out begins at $75,000 ($150,000 for joint filers).

Payroll Tax Deferment

The CARES Act also allows employers and self-employed individuals to defer paying the employer portion of certain payroll taxes through the end of 2020. Half of the deferred amount of payroll taxes will be due December 31, 2021, and the remaining half will be due December 31, 2022. Any taxpayer receiving a Small Business Act Loan are excluded from this deferral program.

Deductibility of Interest Expenses Temporarily Increased

The Cares Act temporarily and retroactively increases the limitation of the deductibility of interest expense under Code Sec. 163(j)(1) from 30{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} to 50{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} for tax years 2019 and 2020.

Temporary Repeal of Taxable Income Limitation for Net Operating Losses (NOLs)

The Cares Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. This will apply to the 2018, 2019 and 2020 tax years, allowing taxpayers to file amended returns and receive refunds for those that qualify.

Net Operating Loss (NOL) Rule Changes

Any losses arising in 2018, 2019, and 2020 can be carried back to the five preceding years. For any NOLs arising in tax years before 2021, those carrybacks may offset 100 percent of income for the prior 5 years. An amended return may be filed to claim the benefit back to the 2013 tax year.

Cancellation of Indebtedness Income

For small businesses that receive certain loans from the government under the CARES act, any such forgiveness of the loan granted to these taxpayers shall not be considered income.

More Changes Likely to Come

As the situation develops, we will continue to document additional changes made at the federal level.

Michael D. Walker is a business, tax and estate planning attorney who has worked with individuals and small to medium-sized businesses for nearly 30 years. A careful listener, Michael skillfully guides his clients to meet the wide variety of legal challenges they face in our current complex world.

Nicholas Rogers - Attorney

 

Nicholas D. Rogers joins SYK Estate Planning and Taxation practice with a passion for helping individuals, small business and nonprofits. His practice includes a focus on estate planning, federal and state tax controversy, business formation and planning, as well as trust and estate administration.