The global COVID-19 pandemic is impacting everyone and presenting challenges to us that we have never encountered. Our government is beginning to respond. To that end we want to provide you with the latest news of some recent tax legislation that has been passed within the last few days.

RECENT TAX LAW RELATING TO COVID-19

To our clients and visitors:  The Government continues to pass meaningful legislation in order to provide a safety net to the US economy and its businesses.  To that end, we will do our best to provide you with highlights from this important legislation and will break it down into Sections to help guide you to those items that will be of immediate interest to you and your business.  Some of the items below have already been posted in our previous COVID Relief article on the website but please read below for the latest since some changes have been made from our previous material.

Delay for filing and paying taxes due this April 15 –

  • More types of entities have been added to the list of taxpayers eligible for the delay.  The list now includes Individuals, Nonresident Aliens, Trusts and Estates, Corporations, REITs, RIC’s, Forms 990-T, Gift and Generation-Skipping Transfer Tax Return.
  • No limits on amounts delayed.  Previously, there were limits of $1M and $10M for individuals and corporations, respectively, but those have now been rescinded.
  • 2nd qtr. ES payments…No change, they are not extended and are still due June 15.  However, there may be a strategy where you could overpay with your extension payment on July 15.  Some national experts believe this may be possible.
  • Estate tax returns are not extended nor are returns that were due on March 15 unless they were extended using prior law.  Payroll and excise tax returns along with Form 4446, Corporation Application for Quick Refund of Overpayment of Estimated Tax, are not extend. Please see our prior article along with the discussion below on the various changes with respect to payroll tax return credits, refunds and reducing payments due to COVID-19.
  • You do not need to file Form 7004, 4868 or 8992 by April 15. Instead, you file them by July 15, 2020 and the extension will take you to the normal extended due date of October 15, 2020. You do need to continue to properly estimate your extension payment that’s due on July 15, 2020 for the extension to be respected.
  • Claims for refund for prior years have not been extended but see below for Net Operating Losses that may now be carried back due to the COVID-19 provisions.

https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

Business Stimulant Loans

www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

SBA Loan Options Available due to COVID19

         
Features  

TYPE OF LOAN

         
    Section 7(a) Loan – aka SBA Traditional Loan Section 7(b)(2) –
Disaster Loan
Section 7(a)(36) – Paycheck Protection Loan (“PPL”)
         
Lender   SBA SBA Approved Banks
Who’s eligible   Depends on the size/industry < 500 Employees < 500 Employees
Dates Available   Ongoing Jan. 31 – Dec. 31, 2020 Feb. 15 – June 30, 2020
Loan Size Max   $5M $2M $10M
Guaranteed by SBA   85% for loans up to $150K; 75% for loans over $150K Same as 7(a) traditional loan 100% through Dec. 31, 2020
Collateral   Yes – required The assets of the business No
Interest Rate   1% – 2.75% 3.75% (for profit) / 2.75% (not-for-Profit) Up to 4%
Duration   10/25 years 30 years 10 Years
Advance Grant Available?   No $10,000  No
Forgiveness Features   No, but 6 months of payment (see §1112 of the CARES Act) No Yes, 8 weeks of payroll, rent, utilities, and mortgage
Allowable use of funds   Many, but can’t duplicate PPL’s Obligations and expenses that could’ve been met if no disaster; can’t duplicate PPL’s Payroll, rent, utilities, and mortgage

Employee retention credit

  • This credit is designed to encourage employers to retain employees and maintain salaries through the rest of the year. The credit is taken against the employer’s share of Social Security payroll tax.  Employer’s will have to meet either a “furlough test” or a “drop in receipts” test. 
  • Payroll tax must first be reduced by qualified sick leave and family leave credits before the retention credit is applied.
  • The credit is equal to 50% of “qualified wages” paid to each employee and it’s taken on a calendar quarter basis. The credit applies to wages paid after March 12, 2020 and before January 1, 2021. 
  • The total wages that can be considered for any employee is limited to $10,000 plus allocable healthcare costs.
  • This credit is mutually exclusive with loan packages in that you can’t take this credit and get a Payroll Protection Loan or Work Opportunity Credits, so you’ll have to choose.
  • New Form 7200, Advanced Payment of Employer Credits Do to COVID-19, is used to file for the credit.
  • Please see the link below for further information and definitions of “qualified wages.”

https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19

Payroll Tax Deferrals

So how do the above combinations of credits reduce and/or defer payroll taxes?

  • The Coronavirus Relief Act provides the previously discussed sick leave and family leave credits (see prior article and website).  While the statute says you can only reduce payroll taxes IR 2020-57 says you can reduce the federal income tax withholding and the employee share of payroll taxes as well.
  • Then, some employers will get an additional credit against their share of Social Security taxes for the above-mentioned Employee Retention Credit.
  • Once you determine the net amount of payroll taxes owed the CARES Act allows you to defer the employer’s Social Security taxes incurred between the date of enactment and December 31, 2020 until 2021 and 2022 50% for each year.
  • Note – you cannot defer payroll taxes if you have a Payroll Protection Loan that is forgiven.
  • Self Employed individuals can defer 50% of their SE tax until 2021 and 2022, same as above.  Also, when the taxes come due in those years’ taxpayers will not have to make ES payments against those deferred self-employment taxes.

Section 139 – Disaster Relief Payments We will add items later

Section 139 payments – medical related payments to employee. Tax free to employee, deductible by employer

Stimulus Payments

2020 stimulus payments to individuals, income limits apply

https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know

Retirement Plan Changes

  • 10% penalty waived on retirement distributions if qualified rules are met. Up to $100k distribution. 3-year repayment available
  • 401K loan up to $100,000
  • Suspension of 2020 RMDs and would also apply to participants who turn age 70 1/2 in 2019 and had not yet received their 2019 distribution.
  • Rollover distributions normally must take place within 60 days.  Now, an individual may repay the distribution within 3 years and avoid paying tax on the distribution.

Charitable Contributions

  • A $300, page 1, deduction, “Above the Line”, will now be allowed for people who take the standard deduction for 2020.  Does not apply if you itemize deductions.
  • There are larger AGI and corporate limits for individuals and Corporations.  
    • Individuals can now make contributions to public charities, in 2020 only, up to 100% of adjusted gross income.  The contributions will be limited to the extent they do not exceed 100% of AGI less other charitable contributions that would’ve traditionally been deductible against the old 60% limit.  
    • Corporations can make contributions to public charities for 2020 up to 25% taxable income.

Employer-Paid Student Loan Payment

  • Employer paid education assistance payments extended to include payment of employees’ student loans in 2020.  The limit has not changed from 2019 it is still $5,250 and for 2020 it can be used for combination of educational assistance and to pay the principal and interest of an employee student loan payment.

NOL Rules Expanded

  • Net operating losses for 2018 through 2020 can be carried back for up to five years. 
  • If there carried forward, they can offset 100% of taxable income until 2021.
  • In 2021, losses from pre-2018 can offset 100% of taxable income but losses from 2018 forward can only offset 80% of post 2020 income.
  • For fiscal year C Corporations, the Cares Act also corrects certain items as a result carryback claims for fiscal years traversing December 31, 2017 can be made or they can elect to forgo the carryback within 120 days after the enactment of the Cares Act.

Suspension of Certain Business Loss Limitations of $500K

  • The business loss limitation of $500K recently enacted by TCJA in 2018 is suspended for 2018, 2019, and 2020. As a result, losses can be used without limitation.
  • Note that when the law is reinstated in 2021 wages will not count as business income. As a result, the limitations may be harder to overcome in the future.

Easing of Excess Business Interest Deduction passed in TCJA in 2018

  • Change to Interest Limitation Rules 
  • For tax years beginning after December 31, 2017 and before January 1, 2022, the business interest deduction limitation disallows all net business interest expense in excess of 30% of the adjusted taxable income of a business. Any amount subject to this limitation may be carried forward to a future tax year indefinitely until it is able to be applied.
  • Under new law for 2019 and 2020, the 30% of ATI floor is increased to 50% however for partnerships, the 30% limit still applies for 2019 but
    • half of the interest is freed up in 2020 and not subject to limitation and
    • half is subject to the same limitations as under current law

For 2020, an election can be made by the taxpayer to use 2019 ATI

Qualified Improvement Property Fix

  • Qualified Improvement Property now has a 15-year life and becomes eligible for bonus depreciation at 100%.
  • The ADS life is reduced to 20 years
  • The change is effective as if the law were originally written in this manner.  As a result, questions remain as to whether taxpayers should file an amended return or should they file for a change in accounting method.

Disclaimer: This article is not intended to constitute written tax advice, the sender intends by the above statements to communicate general information for discussion and educational purposes only, and you should not, therefore, interpret the statements to be written tax advice or rely on the statements for any purpose. Epstein Schneider, PLC. will conclude that you have understood and acknowledged this important cautionary notice unless you communicate to the sender any questions you may have in a direct electronic reply to this message.