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.
The past few months have brought many financial changes. And some of these changes may affect your 2020 taxes. With the continual release of new government guidance, it’s hard to know what to expect. This year, possibly more than ever, it’s important to plan ahead for tax season.
Here are a few things to start thinking about now.
- Due to the CARES act, required minimum distributions (RMDs) will not be required to be distributed in 2020. If a taxpayer has already taken their required minimum distribution for this year, it will be taxable as before. There is a limited period of 60 days after a distribution that a taxpayer can re-contribute the amounts back into the retirement account if it would otherwise qualify for rollover treatment.
- Standard deductions will change for 2020. The IRS reports the following amounts:
- Married filing jointly will go up by $400 to $24,800.
- Married filing separately will go up by $200 to $12,400
- Head of household will go up by $300 to $18,650
- Single will go up by $200 to $12,400
- As a result of the CARES act, donations to charity up to $300 will be allowable as an “above the line” deduction for taxpayers who normally take the standard deduction. Taxpayers who itemize their deductions will still be able to take their charitable deductions as before.
- While it doesn’t apply to all accounts, there will be increases to the contribution limits for some types of retirement accounts, including 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plans. The increased limits will also include 401(k) catch-ups, SEP IRAs and Solo 401(k)s, aftertax 401(k) contributions, SIMPLE retirement accounts, and defined benefit plans. IRA contribution limits will not change from 2019.
- Health savings accounts (HSAs) will also have increased contribution limits. For 2020, the individual coverage limit is $3,550 and family coverage is $7,100. These amounts will increase to $3,600 and $7,200 for 2021.
- Due to increased income limits, more taxpayers will be eligible for the Retirement Savings Contribution Credit, also known as the Saver’s Credit.
- The minimum adoption credit will go up from $14,080 to $14,300.
- The earned income tax credit will go up from $6,557 to $6,660 and the AGI limits have gone up from $55,952 to $56,844 for taxpayers who are married filing jointly and up from $50,162 to $50,594 for all other filing statuses.
- Social Security payroll tax income limits will go up to $137,700 from $132,900.
For individuals who received stimulus money, many questions have been raised about whether the payments will count toward taxable income for 2020 taxes. As a prepayment on a tax credit, the payments will not be taxable. In fact, taxpayers who have a drop in income in 2020 may even be eligible for a remaining stimulus payment. On the other side, taxpayers who will have a significantly higher AGI for 2020 than for 2018 and 2019, some of the stimulus money may need to be repaid.
Unemployment Insurance Benefits
Unemployment benefits are generally taxable, so this is also something to consider when planning for the upcoming tax season.
For businesses who received a PPP loan, there may be some tax considerations. Due to the ever-changing guidelines, there will probably be many questions surrounding tax filing. It will be important to consult a professional who can answer those questions.
These are just a few possibilities that may be different for 2020 taxes. There are additional considerations depending on your unique situation.
The tax professionals at BSB are following the changing guidance and staying updated on current tax policies to help you properly plan for the upcoming tax season. Don’t wait! Contact us sooner, rather than later, to plan for 2020 taxes.
Greetings from our home offices! We hope that you and yours are faring well during this crisis. Our team at BSB is working our normal tax season hours and we are doing our best to provide you with the service levels that you have come to expect from us as your trusted professionals.
We have gotten many requests for information about programs, new and old, that can help mitigate the economic damage that the COVID-19 virus has brought to our world. Some programs are now in place and the biggest one, the CARES Act, should be law very soon.
Tax return filing deadlines and payment information:
April 9, 2020: More tax deadlines were extended to cover individuals, trusts, estates, corporations and more. Included is relief for estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.
March 20, 2020: the IRS announced that the traditional April 15 filing date has been extended until July 15, 2020. https://www.irs.gov/coronavirus/coronavirus-tax-relief-and-economic-impact-payments-for-individuals-and-families
We’ve seen some corresponding action from state governors:
- For profit small businesses with fewer than 50 employees are eligible for loans to cover three months of cash operating expenses up to $50,000. https://onestop.md.gov/forms/maryland-small-business-covid-19-emergency-relief-loan-fund-5e7a6d838bdbb100fe352aa9
- Small Businesses and nonprofits with fewer than 50 employees and annual revenues less than $5 million are eligible for grants to cover three months of cash operating expenses up to $10,000. https://onestop.md.gov/forms/maryland-small-business-covid-19-emergency-relief-grant-fund-5e7a6d8db5d67700fe1e6050
- Virginia has updated its deadlines. Payments of balances due have been extended to June 1, 2020 without penalty: https://www.tax.virginia.gov/news/coronavirus-updates.
Federal legislation that has been passed:
The Families First Coronavirus Response Act was enacted on March 18, 2020. This Act is intended to give funds to all businesses with fewer than 500 employees to provide employees with paid sick leave. These funds come in the form of a payroll tax credit.
For paid leave, a credit of regular pay of 100% of an employee’s pay for up to 80 hours when an employee is unable to work because they are quarantined, unable to work, experiencing COVID-19 symptoms, and are seeking medical diagnosis. This credit is capped at $511 per day and $5,110 in aggregate for a total of 10 days.
For more information see: https://www.irs.gov/newsroom/treasury-irs-and-labor-announce-plan-to-implement-coronavirus-related-paid-leave-for-workers-and-tax-credits-for-small-and-midsize-businesses-to-swiftly-recover-the-cost-of-providing-coronavirus
SBA EILD loans. With the declaration of a disaster, the existing SBA Disaster Loan Assistance program is available to more businesses, non-profits, homeowners, and renters. See: https://disasterloan.sba.gov/ela/information/eidlloans
CARES Act Highlights
On March 27, 2020, the CARES Act was signed into law. Highlights of the CARES act include:
SBA Paycheck Protection Program: The CARES Act provides the SBA with $349 billion for the 7(a)-lending program through December 31, 2020 and increases the government guarantee to 100% through December 31, 2020. Business, include sole proprietors and non-profits, can apply for a SBA 7(a) loan of up to $10,000,000 tied to the payroll costs incurred by a business in determining the size of the loans. Proceeds from these loans used by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payments on a mortgage, payment of rent, and payment on utilities will be forgiven. Eligible payroll costs can’t include compensation above $100,000 in wages. Any amount not forgiven will be subject to a maturity of 2 years at an interest rate of 1%. Contact your bank to explore this program asap. For more information: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp
Employee retention credit for employers: a refundable payroll tax credit for 50% of wages paid during the COVID-19 crisis. Eligible employers, including non-profits, are those whose operations have been fully or partially suspended as a result of government action limiting commerce, travel, or meetings, or have those that have experienced a reduction of 50% in quarterly receipts. Wages are capped at the first $10,000 of wages paid to an employee after March 12, 2020 and before Jan 1, 2021. Wages used for purposes of the Families First Act (above) are not eligible. In addition, business that receive a Small Business Interruption Loan through the Paycheck Protection Program cannot receive the credit. For more information: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Delay payment of employer payroll taxes: The CARES Act allows taxpayers to delay the payment of the employer portion of Social Security taxes incurred after March 12, 2020 through the end of the calendar year. Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022
Net operating losses (NOL’s): NOL’s can offset all taxable income without limit. NOL’s can now be carried back into each of the preceding 5 years.
Individual recovery rebate/credit: An eligible individual is allowed a credit for 2020 equal to the sum of $1,200 (or $2,400 for those filing a joint return), along with an additional credit of $500 per qualifying child. This credit is phase out for taxpayers with AGI of $75,000 or higher on a single return or $150,000 on a joint return.
No 10% penalty on a retirement plan distribution: No 10% penalty will be imposed on a distribution from a qualified plan made before December 31, 2020 on distributions not exceeding $100,000.
RMD requirement waived for 2020: Required minimum distributions are suspended for the 2020 calendar year.
We know this is a lot to take in all at once. We are doing our best to provide you with as much information as possible. We look forward to working through these trying days. Please enjoy the time apart from society to bond with family, exercise, read, and be as productive as possible. Don’t forget those less fortunate. Buy a few extra cans of food and drop them by the local food bank!
The professionals at BSB are here to answer any questions you may have. Please reach out to us today!
The Families First Coronavirus Response Act (H.R. 6201), became law on March 18, 2020. The Act guarantees free testing for the novel coronavirus (COVID-19), establishes emergency paid sick leave, expands family and medical leave, enhances unemployment insurance, expands food security initiatives, and increases federal Medicaid funding.
The Act includes up to 80 hours of emergency paid sick leave for workers who are unable to work while they are sick or complying with COVID-19 restrictions or caring for school age children due to the closure of schools or child care facilities, as well as paid family and medical leave that employees will be able to use to care for family members (not for personal illness) for up to 12 weeks. The first 10 days of emergency family and medical leave may be unpaid, unless employees opt to use accrued paid time off for those days.
The mandatory paid leave provisions apply to employers with fewer than 500 employees and government employers, with exceptions for health care workers and first responders. Self-employed individuals would be eligible for the new benefits provided under the Act. It is not clear if individuals who have self-employment income from their partnership or limited liability company would be eligible for the new self-employed benefits, as the Act does not specifically address those situations. Employers with 500 or more employees would not be subject to those rules. Employers who are required to provide paid time off would need to initially bear the costs of paying their employees, but the federal government would provide payroll tax credits to help cover those costs.
Currently, the federal Family Medical Leave Act of 1993 (FMLA) provides eligible employees up to 12 work weeks of unpaid leave a year and requires group health benefits to be maintained during the leave as if employees continued to work instead of taking leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave. Special rules apply to military personnel.
To be eligible for FMLA, an employee is required to have been employed by their employer for a year, worked for 1,250 hours, and worked in a location where there are 50 other employees within a 75-mile radius. The FMLA applies to all private sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year (including joint employers and successors of covered employers). Many states have enacted laws that are similar to federal FMLA, which apply to smaller employers who may be exempt from federal FMLA. The FMLA also applies to federal, state and local employers. These current provisions remain available for qualifying employees.
Emergency Paid Sick Leave. Through December 31, 2020, the Act requires employers with fewer than 500 employees and government employers to provide all employees (including union employees and regardless of how long the individual worked for the employer, but excluding health care workers and first responders) with 80 hours (e.g, 10 business days) of emergency paid sick leave for full-time workers (pro-rated for part-time employees or employees with varying work schedules) for employees who are unable to work or telework because the employee:
- Is subject to a federal, state, or local COVID-19 quarantine or isolation order;
- Has been advised by a health care provider to self-quarantine because of COVID-19;
- Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- Is caring for an individual subject to or advised to quarantine or isolation;
- Is caring for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions; or
- Is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Generally, employers would pay employees at their regular rate of pay for emergency sick leave, capped at $511 per day ($5,110 in the aggregate) if the leave is taken for an employee’s own illness or quarantine (i.e., for the first three bullets above). Employers would pay employees two-thirds of their regular rate of pay for emergency sick leave, capped at $200 per day ($2,000 in the aggregate) if the leave is taken to care for others or due to school closures (i.e., for the last three bullets above).
An employer cannot require an employee to use other paid leave before using this paid leave. Employers would not be able to require employees to find replacement workers to cover their shifts if employees use emergency paid sick leave. The federal government is supposed to provide a model notice within seven days after enactment, which employers would be required to post at their workplace, informing employees of their right to emergency paid sick leave. The U.S. Department of Labor is directed, within 15 days after enactment, to issue guidelines on how to calculate the amount of emergency paid sick leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from having to provide emergency paid sick leave to employees who need to care for a son or daughter whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 precautions if the imposition of such requirements would jeopardize the viability of the business as a going concern.
Employers would face penalties for failing to comply with the new emergency paid sick leave rules and are prohibited from discriminating against employees who take emergency paid sick leave. Eligible employees could use emergency paid sick leave before using new, emergency paid family and medical leave created by the Act.
FMLA Amendments. The Act would add provisions to the FMLA to provide employees (including union employees) who have been employed for at least 30 days by employers with fewer than 500 employees or government employers, with the right take up to 12 weeks of job-protected leave through December 31, 2020, if the employee is unable to work or telework due to having to care for a child under age 18 if the child’s school or place of child care has been closed (or the child care provider is unavailable), due to the COVID-19 public health emergency. Employers may elect to exclude health care workers and first responders from taking this public health emergency FMLA.
The first 10 days of FMLA under these new provisions may be unpaid. Employees can use other paid time off such as vacation, sick days, sabbatical, or emergency paid sick leave to cover that gap, but employers cannot require employees to use their accrued paid time off before using these 12 weeks of extended FMLA leave. Employers would pay employees two-thirds of their regular rate of pay for this emergency FMLA leave, capped at $200 per day ($10,000 in the aggregate per employee). Adjustments would be made to the amount of paid time off for employees with varying schedules.
The Act gives the U.S. Department of Labor authority to issue regulations that would exclude certain health care providers and emergency responders from being able to take emergency family and medical leave. The Department of Labor also has the authority to issue regulations to exempt small businesses with fewer than 50 employees from the emergency family and medical leave requirements if the imposition of such requirements would jeopardize the viability of the business as a going concern. The Act would also exempt employers with fewer than 50 employees in a 75-mile radius from civil damages in an FMLA lawsuit.
Under the Act, covered employers (those with less than 500 employees) are required to hold an employee’s job open for them until the end of the leave period. However, an exception applies to employers with fewer than 25 employees if the employee’s position no longer exists due to economic conditions or other changes in the employer’s operations that affect employment and are caused by the COVID-19 crisis, and the employer made reasonable efforts to restore the employee’s job. And, if those efforts failed, the employer agrees to reinstate the employee if an equivalent position becomes available within a year.
The Act creates new, refundable payroll tax credits for employers to help cover the costs of this new paid sick and family leave.
Payroll Tax Credits
To assist employers who are required to provide emergency paid sick leave or FMLA leave under the programs described above, the Act provides for a refundable tax credit applicable against the employer’s portion of Social Security or Railroad Retirement Tax Act (RRTA) tax for amounts paid under those programs. The credit is equal to 100% of the compensation paid in each calendar quarter to employees who are not working for the reasons enumerated above, subject to the following limitations:
For payments to an employee who needs time off for self-isolation, diagnosis, or care of a COVID-19 diagnosis, or compliance with a health care provider’s recommendation or order, the credit is capped at $511 of eligible wages per employee per day. For payments to an employee who needs time off to care for a family member who has been exposed to or diagnosed with the COVID-19, or a child under age 18 whose school or place of care has been closed, the credit is capped at $200 of eligible wages per employee per day. The credit for emergency paid sick leave wages is only available for a maximum of 10 days per employee over the duration of the program. For expanded FMLA, the credit is capped at $200 of eligible wages per employee per day and $10,000 for all calendar quarters.
Both of the credits are increased by any amounts paid or incurred by the employer to maintain a group health plan, to the extent those expenses are (1) excluded from the employee’s gross income under the tax code and (2) “properly allocable” to the respective qualified sick or FMLA wages required to be paid under the Act. The exact method of allocation will be provided by regulation at a later date, but the Act provides that the allocation will be treated as properly made if done “on the basis of being pro rata among covered employees and pro rata on the basis of periods of coverage.”
If the credit exceeds the employer’s total liability for Social Security or RRTA tax for all employees for any calendar quarter, the excess is refundable to the employer. The employer may choose not to apply the credit. Further, to prevent a double benefit, the employer cannot obtain a deduction for the amount of the credit. In addition, employers may not receive the credit in connection with wages for which a credit is allowed under Section 45S (credit for paid family and medical leave).
Similar rules apply to a self-employed individual that allow a refundable tax credit against the individual’s self-employment tax. The credit is capped at the lesser of the amounts that apply to eligible wages per employee or the individual’s lost self-employment income. The House-passed version of the Act provides guidance on how to determine the individual’s lost income due to the corona virus.
Notably, required payments for emergency paid sick leave or FMLA under the Act will not be considered wages for purposes of calculating the employer’s portion of the Social Security or RRTA tax. In addition, the tax credits available to an employer are increased by the amount of the employer’s liability for Medicare tax on wages paid under the Act, effectively exempting the emergency sick leave and FMLA payments from that tax as well. In this way, the Act provides employers with two tax benefits: (1) refundable credits against the employer’s portion of Social Security or RRTA tax; and (2) an exemption from, or credit against, the employer’s portion of Social Security or RRTA and Medicare taxes on the wages required to be paid under the Act.
However, the law does not exempt these payments from the definition of wages for the purpose of other taxes (including the employee’s portion of Social Security, RRTA and Medicare taxes).
The Act ensures there is no negative impact to the Social Security program caused by the tax credit or the exemption of sick pay and family leave pay from Social Security tax by authorizing a transfer of funds from the General Fund to the Social Security and disability insurance trust funds to replace the lost employer contributions. The tax provisions discussed herein will apply beginning on a date to be determined by the Secretary of the Treasury after the enactment of the Act and ending on December 31, 2020.
The professionals at BSB are here to answer any questions you may have. Please reach out to us today!
On March 20, Treasury Secretary Steven Mnuchin announced on Twitter that the IRS will extend the federal tax filing deadline from April 15, 2020 to July 15, 2020.
This follows guidance released by the IRS which extended payment deadlines, but did not include an extension of the federal filing deadline. On March 18, the IRS announced:
- All individual and non-corporate federal tax payments (including self-employment tax) of up to $1 million can be deferred until July 15, 2020 with no interest or penalties.
- Corporate federal tax payments of up to $10 million can also be deferred until July 15, 2020 with no interest or penalties.
Although the federal tax deadline has now been extended, Treasury Secretary Mnuchin has urged Americans to file by the original deadline of April 15 in order to take advantage of any tax refunds they may receive. The tax refunds, as well as the additional liquidity made available by the extended deadline, are expected to add $300 billion of funds into the economy during the next few months.
In addition to the federal extension, many states are providing tax relief for state income taxes. The Virginia Department of Taxation announced on March 20 that it has extended certain state income tax payment deadlines to June 1, 2020, at the request of Governor Ralph Northum. Filing deadlines, including the May 1 individual income tax return deadline, will remain the same and interest will be charged on payments made after May 1. For more information and updates about Virginia tax, visit tax.virginia.gov.
While the information on the extension of the federal tax deadline has been widely reported, based on Secretary Mnuchin’s tweet, formal guidance has not yet been released.
We will continue to provide further information as it becomes available.
The professionals at BSB are here to answer any questions you may have. Please reach out to us today!
Congress recently passed a sweeping full-government spending package, The Further Consolidated Appropriations Act, 2020 (The Act). The law is accompanied by substantial changes for taxes and retirement plan funding and distribution. Not only does the new spending bill extend many tax breaks that expired in 2017, but it also includes the first significant retirement-related legislation since 2006, Setting Every Community Up for Retirement Enhancement (SECURE).
As a result of the Act, several popular tax breaks have been extended for individuals and businesses. Some of these extensions include:
- Exclusion of qualified residence debt forgiveness from gross income
- Deduction for mortgage insurance premiums
- Deductions for tuition and education-related expenses
- Reduction of Adjusted Gross Income (AGI) floor for medical expenses
- Incentives for investments in Empowerment Zones
- New Market Tax Credit
- Employer tax credit for paid family and medical leave
- Work Opportunity Tax Credit
The changes enacted though SECURE Act will also affect both individuals and businesses, but the implementation will directly impact the way workplace retirement accounts are established and maintained. Some of the retirement plan changes include:
- IRA contribution age restriction changed
- Age for Required Minimum Distributions (RMDs) raised from 70.5 to 72
- New exemption from penalty for early retirement account withdrawals in specific qualifying situations
- Access to open Multiple Employer Plans (MEPs) extended
- Employers required to extend retirement plan participation to qualifying part-time employees
According to BDO USA, LLP the following regulations are immediately in effect for retirement plans to comply with the new standards:
- Credit card loans are prohibited as of December 20, 2019 and will subsequently be considered as taxable distributions.
- “Stretch” beneficiaries have been eliminated for defined contribution (DC) plans.
- Fiduciary safe harbors are in effect for plans with annuity options.
- Nondiscrimination testing relief is now available for closed DC plans.
- Retirement plans can distribute special qualifying disaster relief payments that are not subject to penalties.
In addition to the changes above, SECURE also includes tax incentives for employers who offer automatic enrollment retirement plans.
What does this mean for individuals and businesses?
The effects of these laws will depend on specific tax and retirement situations. However, taxpayers who qualify for the extended tax breaks should consider filing amended 2018 tax returns. Individuals and businesses affected by changes in retirement savings need to adjust accordingly. Businesses who have been wanting to implement a retirement plan for employees might consider starting one now. Because of the potential complexity of these issues, we recommend consulting a professional trained to maximize benefits and effectively plan for the future. The tax and estate planning professionals at BSB can answer your questions and offer guidance to incorporate current law.
TAX TIPS FOR THE SELF-EMPLOYED
- Establish a Simplified Employee Pension (SEP) Plan by the due date of your 2018 return, including extensions. The contribution to the plan must be made by that due date. For 2018, the maximum allowable contribution to a SEP an employee can make independently of an employer is $5,500 ($6,500 if a catch-up contribution). However, the maximum combined deduction for an active participant’s elective deferrals and other SEP contributions is $55,000 for 2018.
2018 FEDERAL INCOME TAX RATES
|Tax Rate||Joint/Surviving Spouse||Single||Head of
|Married Filing Separately||Estate & Trusts|
|10%||$0 – $19,050||$0 – $9,525||$0 – $13,600||$0 – $9,525||$0 – $2,550|
|12%||$19,050 – $77,400||$9,525 – $38,700||$13,600 – $51,800||$9,525 – $38,700||–|
|22%||$77,400 – $165,000||$38,700 – $82,500||$51,800 – $82,500||$38,700 – $82,500||–|
|24%||$165,000 – $315,000||$82,500 – $157,500||$82,500 – $157,500||$82,500 – $157,500||$2,550 – $9,150|
|32%||$315,000 – $400,000||$157,500 – $200,000||$157,500 – $200,000||$157,500 – $200,000||–|
|35%||$400,000 – $600,000||$200,000 – $500,000||$200,000 – $500,000||$200,000 – $300,000||$9,150 – $12,500|
|37%||Over $600,000||Over $500,000||Over $500,000||Over $300,000||Over $12,500|
Like an annual physical examination is important for maintaining good health, an annual financial examination that includes year-end tax planning can enhance your financial well-being. We are here to assist you to achieve your tax and financial objectives. Contact us today.
Tax Free IRC Section 139 Disaster Relief Payment; Taxable Wage Continuation; Shared Leave Plans and Streamlined Access to Retirement Funds
In the case of a presidentially declared disaster, such as a hurricane, an employer has several opportunities to provide assistance to affected employees that have favorable tax treatment.
Tax Free Employer Assistance under IRC 139
An employer may provide assistance to employees affected by a presidentially declared disaster that is exempt from federal income and employment taxes. The provision of assistance, whether in cash or services, is relatively straightforward and requires no substantiation from the employees, while still allowing the employer to deduct the payments. Since there are virtually no administration requirements, employers can react very quickly to help alleviate its employees’ immediate needs.
The exclusion is provided by Internal Revenue Code (“IRC”) Section 139(a) and specifically exempts from gross income “Qualified Disaster Relief Payments” that are not compensated by insurance or otherwise. IRC Section 139(b), in part, defines a “Qualified Disaster Relief Payment” as any amount paid to, or for the benefit of, an individual to reimburse or pay reasonable and necessary expenses incurred:
- As a result of a qualified disaster for family, living, or funeral expenses,
- For the repair or rehabilitation of a personal residence; or
- For repair or replacement of the contents of a personal residence, to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
Revenue Ruling 2003-12 (“Rev. Rul.”) provides a particularly relevant example for employers trying to help employees affected by a hurricane. In Situation 3 of the Rev. Rul. the IRS wrote, “(p) ayments that employees receive under an employer’s program to pay or reimburse unreimbursed reasonable and necessary medical, temporary housing, or transportation expenses they incur as a result of a flood are excluded from gross income under § 139.” In addition, the Rev. Rul. determined that the amounts excluded from gross income under Section 139 are not subject to information reporting requirements generally imposed by Section 6041.
Salary Continuation will be Taxable to the Employee
The most helpful benefit to employees is often for their wages to continue without interruption even though they cannot perform their expected services for the employer. Wages paid under a policy of salary continuation will continue to be subject to all of the usual income and employment tax provisions.
Contributions of Cash by Fellow Employees to Affected Employees
Planning is required in order to avoid taxation being imposed on employees whom provide assistance to those employees affected by the disaster. An employee cannot simply redirect compensation earned from an employer to an affected employee without being taxed on the earnings under the “assignment of income” or “constructive receipt” doctrine. In order for the employee to make tax deductible contributions of cash to disaster victims, a charitable organization must be involved to secure the personal income tax deduction under IRC 170. This can be accomplished by the employer creating a private foundation (which requires time), or by utilizing an existing charitable organization that creates a fund for a specified group of victims that includes its employees. Once established, contributors can obtain an income tax deduction for their charitable contributions.
Contributions of Unused Paid Time-Off by Fellow Employees to Affected Employees
Another way that employees can assist is by sharing their unused paid time off with employees who have exhausted their earned vacation days. Under the general rules of income taxation the employee who earned the paid time off would be taxed on the value of the days if they were given away to a fellow employee. However, under a written employer-sponsored leave sharing program for a major disaster, employees can donate unused vacation days to other employees who have been adversely affected by a major disaster, without triggering taxation to the donor for the donated time (in this scenario they would not receive a charitable deduction as the income was never recognized initially). Note that an employee is considered adversely affected if the disaster caused a severe hardship that requires the employee to be absent from work. The plan must further provide that donations of leave cannot exceed the donor’s annual accrual; can be drawn upon by other employees who have been adversely affected by a major disaster; cannot be specified by the donor for a particular recipient; and will be valued when paid at the recipients’ normal compensation rate without regard to the normal compensation rate of the donor.
Leave deposited for a particular disaster may be used by only those employees affected by that disaster and should be available only for a reasonable amount of time after the disaster has occurred. Any donated leave that is not used by recipients by the end of the specified time must be returned to the donors within a reasonable time so that the donor may use the leave, except in the event the amount is so small as to make accounting for it unreasonable or impractical. The amount of leave returned to all donors must be in the same proportion as that which was donated. A recipient may not receive cash in lieu of using the paid leave received.
Streamlined Access to Retirement Funds Prior to February 1, 2018
In Announcement 2017-11, the IRS relaxed procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, participants in 401(k) plans, 403(b) tax-sheltered annuities, and 457(b) deferred-compensation plans sponsored by state and local governments may be eligible to take advantage of streamlined loan procedures and liberalized hardship distribution rules designed to provide quicker access to their money. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
While IRA participants are not allowed to borrow from the IRA, they may be eligible to make IRA withdrawals under liberalized procedures.
Not only does this broad-based relief apply to victims of hurricanes, it also applies to a person who lives outside the disaster area who takes out a retirement plan loan or hardship distribution and uses it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.
Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in Announcement 2017-11.
To qualify for this relief, hardship withdrawals must be made by January 31, 2018.
Before accessing retirement funds, it is important to remember that the relaxed procedures have not changed the tax treatment of loans and distributions. Retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less and hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax unless one of several exceptions is satisfied.
For Further Information
Further details are in Announcement 2017-11. More information about other tax relief related to Hurricane Harvey can be found on the IRS disaster relief page. Information on other tax relief for Hurricane Irma will be added to the disaster relief page when available. For information on government-wide relief efforts, visit www.USA.gov/hurricane-harvey or www.USA.gov/hurricane-irma.
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