As the Internal Revenue Service (IRS) continues to catch up from a backlog of unopened mail that resulted from limited staff during the COVID-19 pandemic, the agency announced that it would stop mailing overdue notices to taxpayers who sent paper returns. The temporary suspension of notices is intended to help avoid confusion for taxpayers who have already mailed in checks that have not yet been processed. The issue has affected many individuals, but specifically estates and trusts that filed income tax returns using Form 1041.
If you filed and paid by mail and received a notice of unpaid taxes, the IRS advises the following steps:
- Promptly respond to the notice.
- Ensure that funds remain available.
- Don’t cancel checks for tax payments that haven’t posted.
- Try to avoid calling the IRS due to unusually high call volume as staff continues to process mail buildup.
The IRS also announced that payments will be posted as of the date the payment was received instead of the date the payment was processed. As long as checks arrived before the deadline and funds are available, taxpayers will not be charged penalties or interest. According to the IRS, bad check fees will not be charged for dishonored checks received between March 1 and July 15 due to delays in processing.
For more information about making payments, visit irs.gov/payments.
The tax professionals at BSB have been following the latest COVID-19 developments to provide the most up-to-date information available. Every situation is different, but we are here to help. If you received an overdue notice or have other tax questions, contact us today.
Like other businesses, nonprofits have been affected by the COVID-19 pandemic. Despite the challenges, these organizations are still committed to fulfilling missions, engaging with communities, and caring for employees. In the midst of a crisis, these steps can help your nonprofit organization survive and continue your important work.
- Gather a crisis management team. While crisis management may not usually be a major part of a nonprofit organization, it is necessary in certain situations. In the middle of a vulnerable time, it is crucial to gather and prepare a crisis management team. The team may consist of communications, legal, human resources, finance, and operations personnel, depending on the organization. These individuals can be staff members, board members, or volunteers, but will need the skills and experience necessary to maintain operations critical to the organization’s mission.
- Assess your risk. During a crisis, nonprofits are more vulnerable to lawsuits, so this is a good time to ensure your organization is complying with all necessary regulations. Review your risk profile and take extra precautions to comply with procedures such as Occupational Safety and Health Administration (OSHA) guidelines and the Health Insurance Portability and Accountability Act (HIPAA) regulations to protect your organization.
- Protect your organization’s finances. The financial impact of COVID-19 can’t be ignored, but now is the time to protect your nonprofit organization’s finances. Identify the immediate impact and cost of different programs and postpone or stop anything that isn’t critical to your mission. If possible, have six months of financial reserves available. Take advantage of any additional financial assistance available and consider reaching out to current donors for support.
- Support your people. Employees and volunteers are essential to a nonprofit’s mission, so it is important to protect them. Make sure teams have tools needed to continue work, including technology for working remotely and protective gear if needed.
- Keep communication open. Quick and clear communication is essential during a crisis. Be transparent and communicate more than necessary to make sure all stakeholders stay informed. Messages should be appropriately tailored for each constituency, including employees, donors, beneficiaries, and board members.
- Make sure your infrastructure is secure. Nonprofits must operate strategically to continue to fulfill their missions, and proper infrastructure is necessary. A crisis provides an opportunity to assess your organization’s technological resources and cybersecurity efforts, to ensure private information is protected.
- Stay adaptable. During challenging and uncertain times, organizations must stay adaptable. Pause and stay focused on the purpose and priorities of the organization. Listen to constituents to determine what is needed. Make sure your efforts are supporting the organization’s mission. If you didn’t already have crisis management tools in place, this is the time to create a contingency plan to help your organization moving forward.
Nonprofits are uniquely equipped to solve problems in a way that other organizations aren’t. Staying focused on mission and applying these best practices can help your organization weather a crisis.
Every situation is different, but we are monitoring the most recent developments and will provide updated COVID-19 information as it becomes available. Please contact the professionals at BSB with questions. We are here to help.
While the CARES Act provided unemployment payment accommodations to keep state and local governments financially afloat during the COVID-19 pandemic, nonprofits have not had the same benefits. To combat a nonprofit financial crisis, Congress passed and the President signed the “Protecting Nonprofits from Catastrophic Cash Flow Strain Act of 2020” into law. The law provides an update to emergency unemployment relief for nonprofit organizations and governmental entities.
The new legislation ensures that nonprofit organizations, state and local governments, and federally-recognized tribes can receive unemployment relief through the CARES Act without facing a serious reduction in cash flow.
Under state unemployment programs, nonprofit organizations, state governments, and local governments have the option to reimburse employees, which means they can make payments instead of contributions for their unemployment benefits. Most states will then periodically bill employers for benefits paid to former employees during that period. That means the employers utilizing that payment method are not required to pay unemployment insurance payroll taxes.
The CARES Act provided federal financing for 50% of the unemployment insurance (UI) obligations for those employees for the period from March 13, 2020 to December 31, 2020, but the policy created a potential financial crisis because reimbursing employers were required to pay their bill in full before receiving reimbursements. The resulting financial impact increased the risk of reductions in services, additional layoffs, and closures.
The new law allows states to provide the 50% emergency unemployment relief to nonprofit organizations without the full bill payment requirements. Now the reimbursing employer will be responsible for half of the bill and the federal government will finance the other half. This is great news for nonprofits and other entities that would otherwise face a cash flow crisis.
COVID-19 guidance and legislation continues to develop, but we are monitoring the latest information and will provide updates as they become available. If you have questions about this new law and how it will affect your nonprofit organization, please contact the professionals at BSB. We understand that each situation is unique and we can work with you to develop a plan.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided many types of relief during the COVID-19 pandemic. One of the areas it has addressed is retirement plans. Not only has the CARES Act provided greater flexibility and access to retirement assets, it has also created changes to the way plans are managed. Recently released IRS guidance expands on CARES Act changes and provides further clarification for individuals, employers, and eligible plans.
Here are some of the changes that may affect retirement planning and distributions. This is not a complete list of all the new rules, but will give you a starting point for planning.
Special Tax Exceptions for Coronavirus-Related Distributions
The CARES Act provides special tax treatment for coronavirus-related distributions (CRDs) from a retirement plan for qualified individuals.
- Distributions subject to the special treatment must be made from eligible retirement plans between January 1, 2020 and December 31, 2020.
- CRD exceptions are limited to $100,000 total distributions from all qualified plans by qualified individuals.
- The 10% penalty that is usually assessed for early distributions from IRAs or other qualified plans is waived for CRDs.
- Early distributions can be included in taxable income over a three-year period.
- Instead of being treated as taxable income, distributions can be treated as direct rollovers to an eligible retirement plan as long as the distributions are recontributed to eligible plans within the allocated three-year period after the distribution was received.
Changes to Qualified Individuals
To be eligible for the CARES Act exemption, an individual must be qualified, which means they must meet the following requirements:
- The individual, spouse, or dependent has been diagnosed with COVID-19.
- The individual has experienced financial hardship resulting from COVID-19, including layoff or furlough, reduced work hours due to lack of childcare, or reduced hours due to a business closing or reducing hours.
Changes to Retirement Plan Loans
There are also some changes to retirement plan loans taken between March 27 and December 1, 2020.
- Retirement plan loans typically limited to $50,000 or 50% of vested balance have been increased to a limit of $100,000 or 100% of vested balance.
- Payments can be delayed for up to one year. Loan term will also increase by one year and any applicable interest will still accrue.
Changes for Employers
There are some implications for employers or plan distributors.
- The new guidance does not change the rules for when plan distributions are permitted to be made from employer retirement plans.
- Plans are not required to offer direct rollovers to qualified individuals.
- Under typical circumstances, plan administrators are required to withhold an amount equal to 20% of the distribution, but the withholding will not be required for CRDs.
- Employers may choose when to treat distributions as CRDs regarding changes to loan provisions or repayment schedules. Regardless of the procedures used to identify CRDs, plans must be consistent with similar distributions.
- The $100,000 CRD limit must be taken into consideration in distributions.
- For distributions that are not treated as CRDs by employers, qualified individuals can still treat distributions that meet the requirements as CRDs for income tax purposes.
These are just a few of the changes that have resulted from the CARES Act. If you have questions about your specific situation, please contact the professionals at BSB. We will help you address and plan for any changes that may impact you or your business.
Prior to 2020, anyone over the age of 70 ½ was required to withdraw a certain amount from their traditional IRAs and 401(k) plans each year. With the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, that age limit was raised to 72.
When the COVID-19 pandemic created economic and financial uncertainty earlier this year, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which eliminated required minimum distributions (RMDs) for 2020. This was intended to allow retirees extra time to recover lost value from retirement account investments. The Act allowed anyone who had taken a withdrawal between February 1 to May 15 to return the distribution to their IRA by July 15 to avoid taxation on that withdrawal. Since then, updates to the Act now allow rollovers from all distributions from January 1 to May 15. The due date for those rollovers has been extended to August 31.
Additionally, repayment of RMDs under the CARES Act is not subject to the one rollover per 12-month period. The Act also allows for repayment of RMDs from inherited IRAs.
If you have already taken an RMD for 2020, there is time to return it and avoid paying 2020 taxes on that distribution. If you have already spent that money and choose not to roll it back into the account, beware that it will be subject to taxation.
The tax professionals at BSB can help you determine the best plan to make the most of your unique situation. We are staying updated on the latest developments and will continue to provide information as it becomes available. Please contact us today.
By now, working from home has become a new normal for some employees. Even as some offices reopen, many individuals hope to continue working from home indefinitely. But before adjusting to a permanent work-from-home environment, both employees and employers should be aware of possible SALT (state and local tax) implications.
State tax issues are complex and changing. If you are working from home from a temporary residence for a company in another state, you could potentially be liable for taxes in both your state of primary residence and the state you are temporarily living in. Your company may also need to pay tax in the state where you are doing work from a home office.
Many factors affect taxability of income, including days in the home office, location of the company, and type of organization. While states have different guidelines, nearly all states require income taxes from workers who are temporarily employed in the state. For almost half of states, these taxes apply to even one day of work.
Due to COVID-19, 13 states and Washington, DC have agreed not to enforce tax rules. Additionally, some states, including Maryland, Virginia, and DC have agreements with neighboring areas. However, many states including New York and California, will still tax remote workers for 2020.
In some situations, remote workers receive credits for taxes paid in other states. But when the state taxes are higher in the state where the remote work was performed these credits may not be enough to cover taxes owed.
Businesses must also be aware of tax implications since employees working remotely could trigger nexus rules that raise the business’s state taxes.
Now is the time to meet with a tax professional. Contact us today to discuss the specifics of your situation and determine what you need to do to protect yourself or your company from an unpleasant tax surprise.
Congress has passed and the President has signed a second round of stimulus relief that will provide additional funding to the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). Like the first round, many banks are warning that the new funds are expected to be quickly depleted.
If you have not already applied for PPP and would like to take advantage of the program, don’t delay! If you are not familiar with the program, PPP provides loans to small businesses, non-profit organizations, sole proprietorships, and independent contractors. The loans are intended to cover the costs of payroll, rent or mortgage, and utilities and are capped at either 2.5 times the average monthly payroll cost from 2019 or $10 million. Employees who retain employees during a specified eight-week period may be eligible for loan forgiveness as long as the funds are utilized for the indicated expenses
NOTE: the regulations on the loan forgiveness have not yet been published, so there are no guarantees that your business will be eligible. It is important to document and carefully account for the use of these funds to ensure that you retain your rights to any potential loan forgiveness.
PPP applications can only be submitted once. If you have already submitted an application to your bank, contact them to make sure they still have your application and request that it be submitted to the U.S. Small Business Administration (SBA) as soon as additional funds become available. Applications will be accepted again beginning Monday, April 27. Loans will be approved on a first come, first-served basis, so act quickly.
The latest legislation will also reopen applications for Economic Injury Disaster Loans (EIDL), which have been temporarily suspended awaiting Congressional approval. Business owners who are ineligible for PPP may want to consider this program instead. The EIDL option includes a possible advance sum of $10,000 that can be accepted and forgiven, even if the EIDL application is not accepted.
For more information on SBA resources and updates, visit SBA.gov.
If you have additional questions or need assistance in applying for either of these programs, please contact us. We are here to help.
As the number of employers and employees impacted by the
novel coronavirus (COVID-19) grows each day, employers with workplace retirement
plans may find that employees may be looking to those plans now more than ever
to help cover financial hardships they are experiencing. The Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) (H.R. 748) includes several relief provisions for
tax-qualified retirement plans, expands health care flexible spending accounts
so funds can be used for over-the-counter items, clarifies some health insurance
plan questions, and, through year-end, allows employers to reimburse employees
for student loan payments tax-free. This alert explains those items. Further
guidance will be needed from the IRS and DOL to answer many open questions
about how these relief provisions are intended to work.
Defined Benefit (DB) Retirement Plans
Although it is not clear, based on past practices, the IRS may require employers to make an election to use the provisions described below. Plan amendments memorializing those elections would be needed by January 1, 2022.
Funding Relief. Many employers who sponsor defined benefit (DB) retirement plans (including cash balance plans) are facing large contribution requirements due to very low interest rates and a volatile stock market. The CARES Act provides short-term relief for single-employer DB plans. Specifically, employers have until January 1, 2021, to make any minimum required contributions that were originally due during 2020. The relief applies to quarterly contributions and any year-end contributions, regardless of plan year. When paid, contributions will need to include interest for the late payment.
AFTAP Relief. Also, when determining whether Internal Revenue Code (IRC) Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can (but are not required to) choose to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This could help employers avoid freezing benefits and continue offering lump sums and other accelerated payment forms in 2020, even if the plan’s funded status significantly declined due to COVID-19.
RMDs Not Waived for DB Plans. DB plans are not eligible for 2020 RMD waivers (that relief is only available for defined contribution plans (see below)).
Defined Contribution (DC) Retirement Plans
Coronavirus-Related Distributions and Expanded Plan Loans. Employers who have DC plans — like a 401(k) plan or 403(b) plan — can let participants take up to $100,000 in “coronavirus-related distributions” by December 31, 2020. The distributions would be exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions (and the repayment would be treated as a tax-free rollover when repaid to the plan).
From March 27 to September 23, 2020 (i.e., for 180 days after the CARES Act became law), “qualified individuals” can borrow up to the lesser of $100,000 (instead of just $50,000) or 100% of their entire vested account balance (instead of just 50%). For all new or existing plan loans to an affected participant, repayments due before December 31, 2020, may be delayed one year (but interest is charged during the delay). Also, the one-year delay would not count toward the maximum five-year repayment period for plan loans.
These special “coronavirus-related distributions” and expanded plan loan provisions are available to “qualified individuals,” which means any participant who self-certifies that he or she:
- Has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention);
- Has a spouse or dependent who has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention); or
- Has experienced adverse financial consequences from being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing or reducing the hours of a business owned or operated by the individual; or from other factors, as determined by the Treasury Secretary.
Insight: When former employees no longer have payments made via payroll deductions the loans frequently go into default, resulting in taxable income for the participant at the end of the calendar quarter following the default date and a Form 1099-R would be issued showing the loan balance as taxable income for the year. However, the CARES Act appears to provide a one-year grace period for any loans that were outstanding on or after March 27, 2020. It seems that this one-year extension could delay the income inclusion for one year if a participant with an outstanding loan would otherwise default on the loan due to nonpayment including loss of employment due to a COVID-19 related business closure. To prevent such loan defaults, employers may want to amend the loan documents and/or loan policy so that affected participants can take advantage of the one-year delay even if the participant’s employment is terminated or if the participant is laid off.
Participants that don’t qualify for “coronavirus-related distributions” may qualify for a regular “hardship” withdrawal due to an immediate and heavy financial need, if the plan allows. There are many situations that qualify a participant for regular hardship withdrawals, including expenses or loss of income incurred due to a disaster declared by the Federal Emergency Management Agency, also known as FEMA. Regular hardship withdrawals cannot be repaid to the plan, must be taken into income in the year distributed, and are subject to the 10% early withdrawal penalty (although they are not subject to 20% withholding). Generally, DC plans may also allow in-service distributions for participants who are over age 59½ and may allow vested employer contributions to be withdrawn under a “5 year” or “2 year” rule, so long as the plan document allows it (or is amended to allow it).
2020 Required Minimum Distributions (RMDs) Suspended. The CARES Act waives all 2020 RMDs from DC plans (and IRAs). That waiver includes initial payments to participants who turned age 70½ in 2019 and who did not take their initial RMD last year because they had a grace period until April 1, 2020. The RMD relief does not apply to DB plan participants.
Plan Amendments. Employers can immediately implement the provisions provided by the CARES Act but generally have until the end of the first plan year beginning on or after January 1, 2022, to amend their DC plans for this relief. Amendments to adopt provisions that are not included in the CARES Act require amendment by December 31, 2020.
Insight: This deadline appears to be the same for individually designed DC plans and for IRS pre-approved DC plans
What Should Retirement Plan Sponsors Do Now?
Employers who sponsor workplace retirement plans should review plan procedures to determine if any changes are needed to implement the CARES Act. For example:
- For DC plans that will allow “coronavirus-related distributions” in 2020, a new distribution code would be needed, so that those distributions are not subject to the 10% early distribution penalty tax or the mandatory 20% withholding that would otherwise apply. If employers have more than one DC plan in their controlled group, procedures are needed so that the amount of such distributions made to any individual does not exceed a total of $100,000. These procedures would be similar to those for plans that made qualified disaster distributions over the past few years for certain hurricanes, floods or wildfires. If the DC plan will allow coronavirus-related distributions to be repaid to the plan, procedures are needed to treat those as rollover contributions and to limit the amount of such repayments to the amount of coronavirus-related distributions that the employee took from all DC plans in the controlled group.
- If a DC plan sponsor wants to increase the maximum plan loan amounts available under the plans during 2020, existing plan loan procedures would need to be updated to allow for that increase. Plan sponsors who limit how many outstanding loans a participant can have at any time may want to increase that limit to allow participants to use the increased loan limits. Permissible one-year delays in loan repayments should be documented (such as updating amortization schedules), so that loans will not go into default. DC plans that do not currently allow participant plan loans could be amended to add them.
- DC plan sponsors will need to update their plan operation immediately for the waived 2020 RMD distributions. Plans would use similar procedures as were used when 2009 RMD payments were waived after the 2008 economic crisis.
- The plan’s definitions of covered compensation should be reviewed to ensure it is aligned with the sponsor’s intent, especially with regard to determining if employee assistance and paid leave will be subject to employees’ deferral elections and employer contributions.
Employers may also want to remind participants that they can
change elective deferral amounts at any time in accordance with the plan document
and to inform them how to take advantage of any changes in plan operations or
procedures due to the CARES Act.
Tax-Free Over-the-Counter Products. The CARES Act allows employees to use funds in health care flexible savings accounts (FSAs) to purchase over-the-counter (OTC) medical products, including those needed in quarantine and social distancing, without a prescription. This change also applies to Health Savings Accounts (HSAs). Employers must generally have a “high deductible health plan” (HDHP) to have an HSA for their employees. Several years ago, the Affordable Care Act (ACA) eliminated the ability to use health care FSAs for OTC products, so the CARES Act rolls back that prohibition. The CARES Act also provides that menstrual products qualify as OTC products that can be purchased with health care FSA or HSA funds.
Insight: Employers may want to consult with their vendors to ensure that debit cards or other service delivery mechanisms are updated to accommodate this change in the law, so that employees may begin using health care FSAs or HSAs immediately to purchase COVID-19 related OTC items, such as pain relievers, hand sanitizers, cleaning products, etc.
Insight: Employers may want to remind employees of change in family circumstance requirements that might allow them to change their health care elections including pretax contributions to medical FSAs. Likewise, plan administrators should prepare for an increased number of requests for change.
Health Care Services
The CARES Act requires employer-sponsored group health plans (and health insurers) to address several health care services related to COVID-19, including the following.
COVID-19 Testing. Group health plans and insurers are required to cover approved diagnostic testing for COVID-19, including in vitro diagnostic testing, without any cost-sharing to participants, at their in-network negotiated rate (or if no negotiated in-network rate, an amount that equals the cash price for such tests as publicly listed by the provider).
COVID-19 Prevention. Group health plans and insurers are required to cover any qualifying preventative services related to COVID-19 without cost-sharing to participants. Plans are required to cover these services within 15 days after the date that a recommendation is made regarding the preventative service. Preventative services includes (1) any item, service, or immunization that is intended to prevent or mitigate COVID-19 and is evidence-based with an “A” or “B” rating in the U.S. Preventive Services Task Force’s recommendations or (2) an immunization with a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention.
Expanded Telehealth. Effective March 27, 2020, for plan years beginning on or before December 31, 2021, employers with a HDHP and an accompanying HSA can provide coverage for telehealth services before participants reach their deductible without disqualifying them from being eligible to contribute to their HSA. For calendar year plans, this provision would generally apply for 2020 and 2021. This is consistent with the IRS’s previous announcement that an HDHP will not fail to be an HDHP solely because it provides coverage for COVID-19 related diagnostic testing and services prior to participants satisfying their deductible.
Tax-Free Student Loan Repayments
From March 27 until December 31, 2020, employers can contribute up to $5,250 towards an employee’s student loans and such amount will be excluded from the employee’s taxable income. The employer could either pay the amount to the lender or to the employee. The amount could be applied to principal or interest for “qualified education loans” defined in IRC Section 221(d)(1). The $5,250 limit applies in the aggregate to both the new student loan repayment benefit and other employer-provided, tax-free educational assistance (e.g., tuition, fees, books).
Insight: This appears to be the first time an employer’s payment of an employee’s student loan debt can be made tax-free to employees.
Contact our Employee Benefit Plan team today:
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.
2020 Recovery Refund Checks for Individuals
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).
Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.
A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.
The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.
Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.
The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.
Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.
This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.
Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.
The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.
This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Compensation, Benefits, and Payroll Relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.
Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.
Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.
Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.
Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.
Deferral of Net Business Losses for Three Years
Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.
The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.
Section 163(j) Amended for Taxable Years Beginning in 2019 and 2020
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19.
As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.
Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020.
Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965.
Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate.
Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.
Alternative Minimum Tax Credit Refunds
The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.
Technical Correction to Qualified Improvement Property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.
Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes.
Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible.
For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash.
Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.
Effects of the CARES Act at the State and Local Levels
As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications.
A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona).
A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states.
These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.
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- Center for Disease Control
- Occupational Safety & Health Admin
- World Health Organization
- Food and Drug Administration
- National Library of Medicine
COVID-19 Business Guidance
- CDC Business & Industry Guidance
- CDC Environmental Cleaning
- Food Marketing Institute
- US Chamber Foundation
- SBA Disaster Assistance Loans (To Apply: https://disasterloan.sba.gov/ela/)
- Department of State Travel Advisories
- CDC Travel Health Notices
- US Postal Service Alerts
Aggregation of State Resources
- State COVID-19 Webpages: on US map, click a state to access respective COVID-19 page
National Governors Association: https://www.nga.org/coronavirus
- Count of State Cases Reported
- State Actions to Include:
- Emergency Declarations
- National Guard Activations
- Limits on Large Gatherings
- Statewide School Closures
- Closure of Non-Essential Business
- Additional State Declarations & Actions
American Trucking Association: https://www.trucking.org/COVID19#states
- Federal Declarations
- State Declarations
Federal Motor Carrier Safety Admin: https://www.fmcsa.dot.gov/emergency-declarations
- Federal Waiver: of 49 CFR Parts 390 through 399
- State Declarations & Waivers
Healthcare Ready: https://healthcareready.org/covid19
- Healthcare Sector Resources
- State Emergency Declarations
- State Hours of Service Waivers
- State Weight Limit Wavers
COVID-19 Geospatial Resources: https://napsg.maps.arcgis.com/apps/Media/index.html?appid=d627f416ce49405ca1fe4fe6ce520fed¢er=-88.6223,39.3355&level=2
- State GIS Portals
- State Websites
The professionals at BSB are here to answer any questions you may have. Please reach out to us today!
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