The federal government and numerous states have announced changes in tax filing and payment dates in response to the COVID-19 pandemic. Tax credits have been made available for new family leave and sick leave payments required for employees affected by novel coronavirus. The latest proposed stimulus legislation provides individual cash payments in the form of refundable tax credits, net operating loss carryback relief, and several other items of proposed tax relief. And the Tax Court, like other federal and state courts, is adapting its operations. This alert summarizes the key federal tax developments over the past week.
Delay in Federal Income Tax Filings and Payments Until July 15, 2020
The Treasury Department has announced a three month automatic postponement in the due dates for filing federal income tax returns and making federal income tax payments otherwise due on April 15, 2020. The details were provided in IRS Notice 2020-17 on March 18 and IRS Notice 2020-18 on March 20.
- The relief applies to any individual, trust, estate, partnership, association, company, or corporation with a federal income tax return or federal income tax payment due April 15, 2020.
- The relief applies both to returns and payments of federal income tax (including self-employment tax) for the 2019 tax year that are due on April 15 and to payments of estimated federal income tax (including self-employment tax) for the 2020 tax year that are due on April 15.
- The due date for all such returns and payments is extended to July 15, 2020.
- The period between April 15 and July 15, 2020 will be disregarded in computing any interest, penalty, or addition to tax for failure to file the applicable returns or to pay the applicable taxes.
Taxpayers should note that the relief applies only to federal income tax (including self-employment tax) and does not extend filing or payment dates for any other federal tax. In a liberalization of the relief originally announced on March 17 and 18, there is no limit on amount of federal income tax payments that a taxpayer may defer to July 15. Notice 2020-18 also eliminates a glitch in the prior relief that could have invalidated a corporate taxpayer's automatic six-month filing extension if payments due on April 15 were deferred.
Issues left open after Notice 2020-18 include:
- Whether or not the due date for taking other tax-related actions that are tied to the statutory due date for income tax returns, such as making contributions to individual retirement accounts, is extended. (The use of the term "postponement" rather than "extension" in the notice appears to point toward extension of the other deadlines, but the notice is not explicit on this point.)
- Whether an automatic six-month extension of the filing deadline for returns now due on July 15, 2020, will run from the original due date of April 15 or from the extended due date of July 15.
A few states, including Alabama, California, Connecticut, Indiana, Maryland, New Mexico, and New York, have already announced filing and/or payment deferrals that are coterminous with the federal extension, and it is likely now that the federal filing deadline has been extended that states will conform more generally, because of the dependence of state income tax returns on an underlying federal tax filing.
Proposed Refundable Tax Credits
Proposed stimulus legislation known as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") would provide for cash payments in the form of refundable tax credits of up to $1,200 per individual taxpayer plus $500 per dependent child. A competing bill titled the Take Responsibility for Workers and Families Act ("TRWFA") would provide much larger payments of $9,000 per individual taxpayer, plus $9,000 per dependent child (up to three children), plus $5,000 per family. TRWFA would also explicitly extend benefits to recipients of Social Security and supplemental security income payments.
Refunds would be paid by the Treasury Secretary "as rapidly as possible" and under the most recent version of the proposed CARES Act would be computed as follows:
- A base credit of $1,200 for individual filers, married individuals filing separately, heads of household, and qualifying widowers, or $2,400 for married couples filing jointly
- An additional credit of $500 for each child qualifying for the child tax credit
- The total credit will phase out for joint filers with adjusted gross income in excess of $150,000, heads of household with adjusted gross income in excess of $112,500, and other taxpayers with adjusted gross income in excess of $75,000; the phase-out amount will be 5% of the adjusted gross income in excess of the applicable threshold, up to the total credit available
Phase out amounts, number of children, and filing status would be determined based on the taxpayer's 2019 return if one has been filed, and otherwise could be determined based on the 2018 return or from Social Security benefit statements. If a taxpayer's filing status, number of eligible children, and adjusted gross income for 2019 would result in a greater credit than would be available based on the 2018 return, it may be advisable to file the 2019 return expeditiously, notwithstanding the filing extension described above. If a taxpayer's filing status, number of eligible children, and adjusted gross income for 2020 result in a greater credit than what was already paid via the advance refund process, the additional credit would be available when the 2020 return is filed.
Credits would only be available only to individuals with a U.S. social security number ("SSN")—generally, U.S. citizens, lawful permanent residents, and persons with a visa status that authorizes work in the U.S. If one spouse filing a joint return has an SSN and the other does not, the credit would not be available to either spouse, except where one or the other was a member of the U.S. armed forces.
Proposed Deferral of Employment Tax Liabilities
The proposed CARES Act would also defer the due date for the employer portion of Social Security taxes for calendar year 2020. Social Security taxes are paid at a rate of 12.4% of wages up to a ceiling amount that is $137,700 in 2020, with half paid by the employer and half withheld from the employee's wages. Self-employed individuals pay at the rate of 12.4% of self-employment income up to the ceiling amount, and similar payments are required under the railroad retirement system.
Under the most recent version of the CARES Act, the 6.2% employer portion of Social Security taxes that are due with respect to wages paid in 2020 (and the corresponding portions of self-employment taxes and railroad retirement taxes) would not need to be paid during 2020. Instead, such amounts would be due 50% on December 31, 2021, and 50% on December 31, 2022.
The TRWFA would instead provide a refundable payroll tax credit to employers whose business is severely affected by COVID-19 (defined as a reduction in year-over-year quarterly revenues of at least 20%). The credit would be equal to 80% of wages paid up to $10,000 per employee, would be limited to wages paid from February 1, 2020, through December 31, 2020, and would not be available to employers with more than 1,500 employees and more than $41.5 million in annual revenues for calendar year 2019.
Paid Sick Leave and Family Leave
As described in a prior alert, the Families First Coronavirus Response Act, Public Law 116-127 ("FFCRA"), mandates that private employers with fewer than 500 employees provide paid emergency sick leave and emergency family medical leave to qualifying employees with needs related to COVID-19. Those requirements will take effect on April 2 and will continue through the end of the calendar year. The Department of Labor will have authority to exempt certain small employers (those with fewer than 50 employees).
An employer is allowed a refundable credit against a portion of its employment tax liability to help fund the paid leave benefits required by FFCRA. However, this credit is subject to limitations as described below. Credits are available only for paid leave that is mandated by FFCRA, not for paid leave under existing employer programs, for amounts paid prior to the commencement of benefits under FFCRA, or for payments that otherwise exceed what is required by law.
Credits are subject to the following limitations:
- The creditable portion of a payment for sick leave where the employee is quarantined or experiencing symptoms of COVID-19 is limited to $511 per day
- The creditable portion of a payment for family leave, or for sick leave to care for a family member affected by COVID-19, is limited to $200 per day
- At most 10 days of paid sick leave can be counted for a given employee
- At most $10,000 of family leave can be counted for a given employee
Credits are also available for the portion of group health plan expenses that is allocable to sick leave or family leave payments for which a credit is allowed. Allocation rules are to be provided through regulations or other administrative guidance.
Credits are allowed against the employer's liability for the employer portion (6.2%) of Social Security taxes for a given quarter. However, any credits in excess of the liability for the quarter are refundable. The IRS has announced that it will in forthcoming guidance permit employers to offset all payroll tax liabilities (including both the employer and employee portions of Social Security and Medicare taxes and the deposit of income tax withholdings) and will provide an expedited procedure for refund of any credits in excess of those amounts.
To coordinate with the proposed deferral of Social Security tax liability described above as part of the CARES Act, that legislation would provide for an advance refund of the credits for paid leave so that taxpayers continue to realize the benefit of the credits on a current basis, notwithstanding the deferral of the obligation against which the credits are allowed.
Self-employed individuals who would be entitled to paid leave under FFCRA if they were employees are allowed a refundable credit against income tax that is generally computed on a similar basis to the employer credit.
Amounts allowed as a credit to an employer or self-employed individual are added to the income of the employer or self-employed individual in computing federal income tax liability.
Additional Proposed CARES Act Provisions
Net Operating Loss Relief
The CARES Act and the TRWFA would make a number of changes to liberalize the deductibility of business losses:
- The 80%-of-income limitation on the use of net operating loss ("NOL") carryovers and the excess business loss limitation for noncorporate taxpayers, which were enacted as part of the 2017 tax reform, would both be suspended until a taxpayer's first taxable year beginning after December 31, 2020.
- NOLs arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 (other than a year in which the taxpayer is taxed as a real estate investment trust), could be carried back up to five years. Carrybacks would not be permitted to offset a repatriation tax liability under IRC Section 965.
- Refunds resulting from NOL carrybacks would be eligible for the "quick" refund procedure under existing IRC Section 6411. The CARES Act would extend the period for filing quick refund applications for NOLs arising in a tax year ending during 2018. (This provision presumably is intended to permit quick refunds for all NOLs carried back from tax years covered by the legislation and if so may need to be expanded somewhat to address fiscal tax years that ended in early 2019.)
- Under TRWFA, the excess business loss benefit would not be available and the NOL benefits would be unavailable to (a) any business that has a deduction disallowed under IRC Section 162(m) or 280G for a taxable year that includes any part of 2020 or (b) any corporation that makes or has made significant net distributions to shareholders (in excess of 5% of the value of the corporation's stock) in any taxable year ending after 2017.
Retirement Plan Distributions
The CARES Act and TRWFA would make it easier for taxpayers to access funds in a retirement account to meet needs related to the pandemic. For "coronavirus-related distributions" in 2020:
- The 10 percent early withdrawal penalty would not apply to the first $100,000 of distributions to an individual.
- The amount that must be included in taxable income would be spread evenly over the 2020, 2021, and 2022 tax years, unless the taxpayer elected to include it all in 2020.
- At any time within three years and a day of the distribution, the recipient would be permitted to recontribute some or all of the distribution to any retirement plan or account to which the distribution could have been rolled over tax-free. The amounts recontributed would not be subject to income tax and will be treated as rollovers for purposes of computing contribution limits.
A coronavirus-related distribution is a distribution that is made to an individual:
- who is diagnosed with COVID-19 or a SARS-CoV-2 infection,
- whose spouse or dependent is so diagnosed, or
- who experiences adverse financial consequences as a result of quarantines, layoffs, business closures, child care responsibilities, or certain other factors attributable to SARS-CoV-2 or COVID-19.
The CARES Act would also liberalize the rules allowing loans from certain retirement plans to individuals meeting the tests in the preceding paragraph and would give plans a grace period to amend their terms to conform to the new rules for loans, contributions, and distributions.
Finally, the CARES Act would loosen the required minimum distribution requirements for certain defined contribution plans and IRAs for 2020 and allow a grace period for conforming amendments to plan documents.
Charitable Contribution Deductions
The proposed CARES Act would increase the availability of charitable contribution deductions in 2020 both by allowing certain individual contributions to be deducted "above-the-line" and by loosening or eliminating percentage limitations on the deduction.
Up to $300 of charitable contributions made by an individual in 2020 would be deductible in computing adjusted gross income (meaning the deduction is available even for taxpayers who claim the standard deduction). To qualify, the contribution would need to be made in cash, to an organization (other than an IRC Section 509(a)(3) supporting organization) eligible to receive contributions subject to the 50% contribution limitation under IRC Section 170(b)(1)(A), and not to a donor advised fund.
The CARES Act would also adjust the percentage limitations on deductions for charitable contributions made in 2020 by:
- allowing cash contributions by electing individuals to be deducted without regard to the 50% limitation (for contributions that would otherwise be subject to that limitation);
- increasing the limitation percentage for electing corporations from 10% to 25% of taxable income (but only for cash contributions); and
- increasing the limitation percentage for contributions of food inventory from 15% to 25%.
Business Interest Limitation
For taxable years beginning during 2019 or 2020, the CARES Act would increase the cap on deductibility of business interest from 30% to 50% of adjusted taxable income. For partnerships, in lieu of the relaxed cap, 50% the excess business interest allocated to a partner for a taxable year beginning during 2019 would be deductible by the partner (without respect to adjusted taxable income limitation) in the partner's first taxable year beginning during 2020. A taxpayer would be permitted to elect out of either of these rules.
Qualified Improvement Property
The CARES Act would add qualified improvement property to the class of 15-year property for purposes of the accelerated cost recovery system. This change would have the effect of making such property eligible for expensing under IRC Section 168(k).
Aviation Excise Tax Holiday
The CARES Act would suspend the application of the excise taxes on passenger airline tickets, transportation of property by air, and kerosene used in commercial aviation during the period from the date of enactment until the end of 2020.
Accelerated Recovery of AMT Credit
After the elimination of the corporate alternative minimum tax ("AMT") in 2017 tax reform, corporations are permitted to utilize their carryover AMT credits subject to the limitations on such credits under prior law. In addition, corporations can utilize excess credits over a four-year period ending in the first tax year beginning during 2021.
The CARES Act would accelerate the period for utilizing excess AMT credits so that they may be used in full in the first tax year beginning during 2019, and would allow taxpayers to elect to utilize all excess credits instead in the first tax year beginning during 2018.
The CARES Act would provide for partial forgiveness of certain federally guaranteed small business loans in order to fund payroll and certain obligations for mortgage, rent, and utility payments. The cancellation of indebtedness under this provision would be excluded from gross income for tax purposes.
Additional Proposed TRWFA Provisions
The TRWFA includes a laundry list of tax-related provisions, some of the more significant of which are:
- Further deferral of 2019 tax payments to October 15, 2020, for individuals filing their returns on extension.
- Refundable credits against payroll tax for charity care provided by hospitals and for the construction, lease, retrofitting, and build-out of hospital facilities for the diagnosis, prevention, or treatment of COVID-19 and related conditions.
- Provisions to liberalize the earned income tax credit, the child tax credit, and child care tax credit.
- An appropriation of $236 million for taxpayer services provided by the Internal Revenue Service to assist in novel coronavirus preparation and response.
- Corporate disclosure requirements for companies receiving stimulus-related benefits that include country-by-country financial and tax reporting.
- Modification of the credit system for paid sick and family leave by extending the availability of credits through 2021, providing a larger credit for certain sick leave payments, and denying the credit to employers with 500 or more employees (as determined under the Affordable Care Act "applicable large employer" rules).
Restrictions on Tax Court Operations
The U.S. Tax Court has enacted several changes as a result of the pandemic. The Court:
- has closed its building,
- will not accept or process mail, and
- has cancelled several trial sessions through April 30
Parties with disputes should still work closely and exchange relevant information. Though documents will no longer be hand-deliverable, taxpayers may still satisfy deadlines by mailing proper documentation. The Court will determine timeliness by the United States Postal Service postmark or the delivery certificate of a designated private delivery service.
Electronic systems such as eAccess and eFiling remain operational.