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Key Tax Changes Under Covid-19-Related Legislation

April 2020

We are here to help you navigate the recent deluge of legislation designed to ease the severe economic strain placed on individuals, employers and business operations as a result of COVID-19 and the related social distancing measures imposed to "flatten the curve."

The Families First Coronavirus Response Act ("FFCRA," PL 116-127, enacted 03/18/2020) and the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act," PL 116-136, enacted 03/27/2020) include provisions designed to ease the economic strain COVID-19 has put on individuals, employers and business operations.  Key tax-related changes under this legislation include:


I.        Tax Return Filing and Payment Deadline Extended to July 15, 2020.


The IRS and all states provided all individuals, trusts, estates, corporations, limited liability companies, partnerships and associations, regardless of whether or how much they are affected by virus, an extension of time to July 15, 2020 to file federal / state income tax returns, to file federal gift and generation-skipping transfer tax returns (GST), to pay federal / state income tax liability with respect to the 2019 tax year, to pay federal gift and GST tax liability with respect to the 2019 tax year and to make estimated federal income tax payments with respect to the 2020 tax year that would have otherwise been due on April 15, 2020.  Taxpayers do not have to file Form 4686 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.


This extension of time will not impact your ability to file earlier and receive any federal and/or state income tax refunds in advance of the tax payment deadline.


As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.


II.        Paycheck Protection Program – Loan to Employers Eligible for Forgiveness.

 

Starting April 3, 2020, the CARES Paycheck Protection Program lets employers borrow up to 2.5 times their average monthly payroll costs incurred during the one-year period prior to the loan to cover payroll, employee benefits, rent and utilities incurred and paid from February 15 through June 30, 2020.  The loan will be forgiven (less interest not to exceed 4 %, which will not be forgiven) if used solely for those purposes:

(1)   Payroll and Benefit Costs:

 o    Salary, wages, commission, and tips

 o    Payment for vacation, parental, family, medical, or sick leave

 o    Allowance for dismissal or separation

 o    Group health care benefits including insurance premiums

 o    Retirement benefits

 o    State and local payroll taxes

(2)   Rent

(3)   Utilities (electricity, gas, water, transportation, telephone, or internet access)

 

The only things that would limit your ability to obtain full forgiveness of the loan would be:

(a) if you do not maintain the same average amount of FTE employees during the covered period that you had during one of the following two periods, at your option: Feb 15, 2019 – June 30, 2019 or Jan 1, 2020 – Feb 29, 2020; or

(b) if you were to reduce monthly salaries or wages for any employee during the covered period by more than 37.5 % (or by more than 25 % of 3 months' salary paid in the first quarter of 2020) for those employees making $100,000 or less.

 

Contact your bank (SBA Participating Lender) immediately to submit an application.


III.        Employee Retention Credit For Employers Subject to COVID-19 Closure.


For wages paid after March 12, 2020 and before January 1, 2021, eligible employers (including tax-exempt organizations) are allowed a new refundable payroll tax credit equal to 50 % of the qualified wages paid.  The total eligible wages per employee are $10,000, resulting in a maximum credit of $5,000 per employee.  To qualify for the credit, the business must have operated at some point during 2020 and COVID-19 has to have resulted in either of the following economic conditions:


(1)   Business operations are fully or partially suspended due to orders from an appropriate government authority limiting commerce, travel or group meetings due to COVID-19; or


(2)   Business gross receipts for at least one calendar quarter are less than 50 % of the gross receipts received during the same calendar quarter(s) in the prior year.  (This period of significant decline in gross receipts is recognized until the gross receipts for a calendar quarter are greater than 80 % of gross receipts for the same calendar quarter in the prior year).

Further, employers with more than 100 full-time employees during 2019 must additionally prove that the economic condition impacting their business renders an employee unable to provide services to that employer.  For employers with 100 or fewer full-time employees, the credit is allowed regardless of whether an employee is able to provide services, as long as one of the economic conditions is demonstrated.

 

IV.       Favorable Treatment for COVID-19-Related Payments from Health Savings Accounts.

 

Health Savings Accounts ("HSA) have both advantages and disadvantages as compared to Flexible Spending Accounts when paying for health expenses with untaxed dollars. One disadvantage is that a qualifying HSA may not reimburse an account beneficiary for medical expenses until those expenses exceed the required deductible levels. But the IRS has announced that payments from an HSA that are made to test for or treat COVID-19 will not affect the status of the account as an HSA and the account holder will not be taxed, even if the HSA deductible hasn't been met. Vaccinations continue to be treated as preventative measures that can be paid for without regard to the deductible amount.

 

V.        Payroll Tax Credits For Required Paid Leave / Exemption from Social Security.


A.        Sick Leave Payroll Tax Credit.


The Emergency Paid Sick Leave Act (the "EPSLA") generally 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 (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). Employers subject to this mandate may receive an advance (including any refundable portions) of the payroll credit to help cover the expense of providing the required paid sick leave.  The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver. The tax credit corresponding with the EPSLA mandate is a credit against the employer's 6.2 % portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by (1) the amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income and (2) the employer's share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA. Credit amounts earned in excess of the employer's 6.2 % Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid in a period (1) beginning on a date determined by IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020.  Paid sick leave is also available to employees who were laid off not earlier than March 1, 2020, had worked for the employer for at least 30 of the last 60 calendar days prior to being laid off and were rehired by the employer.  Employers may elect to provide more paid leave than mandated, but the corresponding payroll tax credits are capped at the FFCRA's mandatory paid leave wage amounts.

 

B.        Family Leave Payroll Tax Credit.

 

The Emergency Family and Medical Leave Expansion Act ("EFMLEA") requires employers with fewer than 500 employees to provide both paid and unpaid family leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy) to an employee to care for the employee's child under age 18 because of a Coronavirus emergency declared by a federal, state, or local authority that either: (1) closes a school or childcare place or (2) makes a childcare provider unavailable. Employers subject to this mandate may receive an advance (including any refundable portions) of the payroll credit to help cover the expense of providing the required paid family leave.  Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee's pay rate and pay hours. However, the paid leave can't exceed $200 per day and $10,000 in the aggregate per employee. The tax credit corresponding with the EFMLEA mandate is a credit against the employer's 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.

 

C.        Self-Employed Income Tax and Family Leave Credits.

 

FFCRA provides refundable income tax credits (including against the taxes on self-employment income and net investment income) for sick and family leave to a self-employed person 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 the sick and family leave credits to the extent that an employer would earn the payroll sick and family leave credits during a period a period (1) beginning on a date determined by IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020, as if the self-employed person were an employee.

 

(1)  Sick Leave.  The self-employed person can receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit. However, those 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 sick leave from an employer under the FFCRA.

 

(2)  Family Leave.  The self-employed person can receive an income tax credit with a maximum value of $10,000 as per the payroll family leave credit. However, under rules similar to those for the self-employed sick leave credit, that amount is 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 FFCRA. 

 

D.        Exemption for Employer's Portion of any Social Security (OASDI) Payroll Tax or Railroad Retirement Tax Arising from Required Payments.

 

Wages paid as required sick leave payments because of the EPSLA or as required family leave payments under the EFMLEA aren't considered wages for purposes of the employer's 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.

 

VI.       Deferral of Employer Social Security Taxes.

 

The CARES Act delays the due dates for depositing the employer portion of Social Security taxes, i.e., 6.2 % of wages paid by the employer and earned by self-employed individuals. Fifty percent (50 %) of the such taxes due from March 27, 2020 through December 31, 2020 are due on December 31, 2021. The remainder of such taxes are due no later than December 31, 2022. The delayed due dates are not available to employers that receive certain loan and indebtedness forgiveness under the CARES Act.

 

VII.     Increased Flexibility in Accessing and Managing Retirement Plan Funds.

 

A.                Coronavirus-Related Distributions.

 

Individuals can take "coronavirus-related distributions" of up to $100,000 per year from their qualified retirement plan or individual retirement account (IRA) without being subject to the 10 % early withdrawal penalty. The individual may then choose to either:

(1)  Pay income tax on the distribution by including the amount in income ratably over a three-year period or

(2)  Repay such distribution to their qualified retirement plan or IRA within three years of receiving the distribution.

 

A "coronavirus-related distribution" is a distribution made on or after January 1, 2020 and before December 31, 2020, to an individual:


  • Who is diagnosed with COVID-19 by a CDC-approved test;
  • Whose spouse or dependent is so diagnosed
  • Who experiences adverse financial consequences due to quarantine, furlough, lay off or reduced work hours due to COVID-19;
  • Who experiences adverse financial consequences for being absent from work due to a lack of child care because of COVID-19; or
  • Who satisfies other factors as determined by the Secretary of the Treasury.

B.                 Increased Retirement Plan Loans Permitted.

 

The CARES Act also increases the maximum amount of qualified plan loans to the lesser of $100,000 and 100 % of a participant's vested account balance. Such loans are available during the 180-day period beginning on the date of enactment of the CARES Act. The due date for loan repayments due through the end of 2020 must be delayed for one year and repayments must be appropriately adjusted to reflect such delay and any interest accruing during such delay.

 

C.                Required Minimum Distributions Waived in 2020.

 

The CARES Act also provides for a temporary waiver of the required minimum distribution (RMD) rules for tax qualified retirement plans and IRAs. The waiver applies to any distributions that are required to be made during the 2020 calendar year (other than such distributions having been made before January 1, 2020).

 

Plans or annuity contracts must be amended for the RMD waiver and the coronavirus-related distributions and/or the increase in plan loans if permitted by the plan or IRA on or before the last day of the first plan year beginning on or after January 1, 2022, or such later date as the Secretary of the Treasury provides, or two years after such date for governmental plans.

Related Practice Areas

Employment
Tax

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