COVID-19 Resources – Tax Relief

The federal government recently took several steps to lessen the economic impact of the COVID19 pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “Act”). Below is a brief overview of the tax implications of these actions. We are happy to speak with you directly regarding any detailed questions relating to specific provisions as well as the impact on particular individual and business taxpayers.

Tax Return and Payment Deadline

The 2019 federal income tax filing and payment deadlines for all taxpayers who file and pay their income taxes on April 15, 2020, are automatically extended until July 15, 2020. This extension applies to all returns for individuals, trusts, partnerships and corporations and is automatic; taxpayers do not need to file any additional forms to qualify. This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020.

Taxpayers should note that this relief only applies to federal income tax returns and payments otherwise due April 15, 2020, not state tax payments or deposits or payments of any other type of federal tax. However, taxpayers in New Jersey and New York have also been granted this relief by their state governments. Thus, a taxpayer in New Jersey or New York will have identical July 15, 2020 deadlines for their federal and state income tax returns and payments.

Individual Rebate Checks

The Act provides a rebate for eligible individuals of up to $1,200 for single filers ($2,400 for joint filers), plus $500 per qualifying child. Rebates are subject to phase-out thresholds beginning at $75,000 of adjusted gross income (“AGI”) for single filers ($150,000 for joint filers). Rebates are not available for single filers with AGI over $99,000 ($198,000 for joint filers). AGI is determined from the taxpayer’s 2019 return, or his or her 2018 return if no 2019 return has been filed.

Retirement Plan Relief

The Act waives the 10% early withdrawal penalty on withdrawals up to $100,000 from a retirement plan for an individual who: (i) is diagnosed with COVID-19; (ii) has a spouse or dependent diagnosed with COVID-19; (iii) experiences adverse specified financial consequences as a result of COVID-19; or (iv) meets other criteria as determined by the IRS. The Act permits individuals to either pay tax on the income from the distribution ratably over a three-year period or to repay that amount tax-free back into the plan over the same period. Significantly, those repayments would not be subject to any retirement plan contribution limits.

The Act increases the current retirement plan loan limit to the lesser of $100,000 or 100% of the participant’s vested account balance. In addition, individuals with a currently outstanding loan with a repayment due through December 31, 2020 can delay their loan repayment(s) for up to one year.

The Act also contains a temporary waiver of required minimum distribution rules for certain retirement plans and accounts for the 2020 calendar year.

1031 Exchange Deadlines Extended

On April 9, 2020, the IRS issued Notice 2020-23, which provides that if the end of a taxpayer’s 45-day Identification Period or 180-day Exchange Period in a deferred exchange, or the parallel periods in reverse exchanges under Revenue Procedure 2000-37, falls between April 1 and July 15, the applicable period is automatically extended to July 15, 2020. Taxpayers may opt out of these automatic extensions.

Increased Charitable Deductions

The Act provides an above-the-line deduction for cash contributions up to $300 regardless of whether an individual elects to itemize deductions. In addition, the Act suspends the 50% of AGI limitation for individuals who itemize, allowing them to take a charitable deduction for up to 100% of their AGI. However, cash contributions made to a supporting organization or a donor-advised fund do not qualify for either benefit. For contributions of food inventory, the limitation is increased from 15% to 25% and for corporations, the 10% limitation is increased to 25%.

Income Exclusion for Certain Employer Payments of Student Loans

The Act allows an individual to exclude up to $5,250 from income for educational repayment assistance from an employer. Educational assistance includes payments made by an employer: (i) to an employee or a lender, of principal or interest, on a qualified education loan; or (ii) for expenses incurred for tuition, books, supplies and equipment.

Employee Retention Credit

The Act provides eligible employers with a refundable payroll tax credit for 50% of “qualified wages” paid or incurred between March 12, 2020 and January 1, 2021. The credit is available to employers carrying on a trade or business during calendar year 2020 whose: (i) operations are fully or partially suspended due to a COVID-19 related shutdown order; or (ii) gross receipts decline more than 50% compared to the same calendar quarter in the prior year. Tax-exempt organizations are also eligible for the credit.

Employer Payroll Taxes Payment Relief

Employers and self-employed individuals are allowed to defer payment of Social Security taxes for the period from March 27, 2020 through December 31, 2020. All of the employer portion and 50% of the Social Security tax incurred by self-employed persons qualify for the deferral. Half of any tax deferred is to be paid by December 31, 2021 with the balance to be paid by December 31, 2022.

Increased Net Operating Loss Carryback

The Act allows for a net operating loss (“NOL”) arising in a tax year beginning in 2018, 2019 or 2020 to be carried back for five years and for NOLs arising before January 1, 2021 to fully offset income. Losses must be carried back to the earliest year available for offset.
For subsequent tax years, the limitations imposed by Tax Cuts and Jobs Act of 2017 (“TCJA”) will remain, but deductions for qualified business income, foreign-derived intangible income, and global intangible low-taxed income will not be taken into account.

Loss Limitations for Taxpayers Other than Corporations

The Act suspends the implementation of the loss limitations of IRC Sec. 461(l) until tax years beginning after December 31, 2020, allowing non-corporate taxpayers to deduct excess business losses arising in 2018, 2019 and 2020. It also makes a number of technical corrections to that code section.

Increased Limit for Business Interest Expense Deduction

The Act increases the business interest deduction limit to 50% of adjusted taxable income for taxable years beginning in 2019 and 2020, an increase from the prior 30% limit. A business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation if it produces a greater deduction. However, special rules apply to partnerships.

Qualified Improvement Property

The Act corrects an unintentional result of the TCJA, now treating qualified improvement property as 15-year property and bonus depreciation eligible. The change is retroactive as if included in TCJA and is effective for property placed in service after December 31, 2017.

Defined Benefit Plan Funding Extension

The Act extends the due date for contributions to a single-employer defined benefit plan due during
2020 until January 1, 2021. However, interest will accrue on contributions due earlier.

Conclusion

Due to the wide range of tax relief offered by the federal government, individuals and businesses should review their particular situations with qualified tax professionals. For instance, some taxpayers will qualify for relief only obtainable by filing amended returns for prior tax years or by making certain tax elections. Moreover, the relief offered by the federal government may not be matched by state and local governments. Taxpayers must carefully ensure that decisions resulting in federal tax relief will not adversely affect their state and local taxes.

Winne Banta’s tax professionals stand ready to assist with any questions you may have or planning that may be appropriate for you or your business and will continue to keep you informed of new developments in the tax law.