The coronavirus pandemic has had a major impact on many aspects of our lives, and the tax landscape is no exception. The Federal Government and many state governments have extended deadlines for tax filings and payments, and have made changes to deduction allowances and use of retirement account funds for the 2020 tax year. The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a number of relief provisions for both individuals and businesses, including loans, tax relief, stipends and additional unemployment insurance.
This is the second of three posts outlining key provisions of the CARES Act, part of the historic $2.2 trillion stimulus package intended to inject life into the economy. In this article, we will focus on the tax implications.
Extended Tax Deadlines
- Individuals, Trusts/Estates, C-Corporations: The income tax filing and payment deadline has been extended from April 15 to July 15. This includes Section 965 (Federal Repatriation Tax) payments for individuals and estimated tax payments typically due on April 15, regardless of amount. You do not need to file anything with the IRS to qualify for the 3-month extension.
- Gift Tax Returns: The filing and payment deadline has been extended from April 15 to July 15.
- FBAR Filings for Foreign Bank Accounts: The filing deadline will be extended automatically to October 15 if the return is not filed by April 15.
- Not for Profits: There is no change in the May 15 filing deadline
If you will be getting a refund, the IRS encourages you to file your return as soon as possible. We suggest that you set up direct deposit for your refund, as processing could be delayed more than usual while the IRS also processes stimulus checks for taxpayers.
State tax deadlines vary from state to state. Last month the AICPA published a detailed outline of COVID-19 tax relief for each state. It is updated frequently, so be sure to check back for the latest information.
As of April 6, 39 states have matched the IRS’s payment and filing deadline extension from April 15 to July 15 for all entities (including Individuals, Trusts/Estates, and C-Corporations). This includes the following states:
- New York
- Rhode Island
Several states have extended the April 15 deadline to a date other than July 15. This includes Virginia, whose filing and payment deadline for Individuals, Trusts/Estates, and C-Corporations is now June 1.
Despite these extensions, we will continue to send tax accountants information on your behalf prior to the original deadline. This is helpful for the following reasons:
- While many states have followed the IRS’ lead for deadline extensions, many have been slower to extend these deadlines, or have put different deadlines in place. This creates uncertainty for all of us.
- This information is helpful for cash flow planning purposes
- It is best to keep momentum going forward during the tax season and avoid a backlog prior to the new deadlines.
Provisions for Individuals
The CARES Act includes many relief provisions for taxpayers. Some of these are as follows:
Economic stimulus payments will be issued to qualifying individuals, couples and families.
- Up to $1,200 per individual or $2,400 for married-filing-joint couples
- Additional $500 per child
- Low-income citizens who typically are not required to file tax returns do not need to file to obtain their stimulus checks.
- Benefit phases out at higher income levels (based on most recently filed tax return)
- Single – over $75,000 (completely phased out at $99,000)
- Head of household – over $112,500 (completely phased out at $136,500)
- Married Filing Jointly – over $150,000 (completely phased out at $198,000)
Charitable contribution deduction limits have been adjusted for the 2020 tax year for gifts to public charities. It does not apply for gifts to private foundations or Donor Advised Funds (DAFs).
- For taxpayers who do not itemize, up to $300 for charitable contributions can be deducted for the 2020 tax year.
- For 2020 only, the 60% AGI limitation on cash contributions is waived for those who itemize. This means that taxpayers can claim an unlimited itemized deduction for charitable contributions.
Retirement plan distributions, loans and penalties have been adjusted for 2020 only.
- The 10% penalty is waived for early withdrawals for coronavirus-related distributions up to $100,000. The payment of federal income tax on these distributions can be spread over three years. Additionally, the distributions can be contributed back into the plan within three years, and do not count toward the usual limits on retirement plan contributions. Examples of qualified distributions related to COVID-19 include:
- Cost of care for you or your spouse if diagnosed with COVID-19
- Financial distress due to quarantining, business closure, layoff or a reduction in hours due to COVID-19
- Maximum loans from retirement plans have been increased, to the lesser of 100% of the participant’s accrued benefit (up from 50%) or $100,000 (up from $50,000). This increase is available until Sept. 22, 2020 (i.e., for 180 days after the CARES Act was enacted). Repayments for outstanding loans due on Dec. 31, 2020 may be delayed for one year, although interest will continue to accrue.
- Required Minimum Distributions (RMDs) are waived for 2020, regardless of whether the individual has been impacted by COVID-19.
Provisions for Businesses
The Employee Retention Credit is a credit against the employer’s portion of Social Security taxes paid on behalf of the employee. It covers 50% of qualified wages up to $10,000 per employee per quarter, including health benefits, paid to employees who are not working due to full or partial closure of the business or a significant loss in revenue. It applies to wages paid March 13 – December 31, 2020. Credit is applied against payroll taxes owed (after reduction of other credits – e.g., as provided for by the Families First Coronavirus Response Act). Any excess is refundable to the employer.
Employers are eligible if you have experienced a decrease in revenue due to COVID-19. Employers with 100 or fewer employees qualify if you have earned less than 50% of revenue by quarter compared to the previous year. You will continue to receive the credit until you have a quarter where you reach 80% of your prior year’s quarterly revenue level. Larger employers are subject to additional requirements. The credit is also available to non-profit organizations.
The Deferral of Payroll Tax provision enables employers to defer a portion of employees’ Social Security Tax for Payroll Taxes incurred March 27 – December 31, 2020 according to the following schedule:
- 50% due by Dec. 31, 2021
- 50% due by Dec. 31, 2022
A number of provisions for Net Operating Loss (NOL) Carrybacks may also affect you. The Carryback period has been extended from 2 to 5 years, and carrybacks are now allowable for 2018, 2019 and 2020 losses. Prior year returns can be amended dating back to 2013 to take advantage of these new NOL carryback rules. NOLs for 2018-2020 can now fully offset taxable income vs. the prior 80% limit.
Qualified Capital Improvements (i.e. 15 year property) depreciation rules have also been adjusted. 100% (bonus) depreciation is now allowed in the year of purchase.
This remains a very fluid situation, and we will continue to provide updates as things change. We recommend that you consult with your tax advisor about your specific circumstances.