By Jack Kiley, CPA
On March 27, the Government moved with uncharacteristic speed to pass what is called the Coronavirus Aid, Relief, and Economic Security Act more commonly known as the CARES Act. This massive 800-page bill includes aid on support for specific industries, businesses as well as individuals. In fact, its fair to say that there is something for everybody in this bill.
In addition to some innovative loan provisions for small and medium size businesses, there are several temporary tax provisions. The following are some of the provisions of interest to most taxpayers.
One of the most widely cited items in the Bill is cash payments to individuals. These payments will be $1200 per person with an additional $500 each qualifying child (read this to be child for purposes of claiming the child tax credit). These payments will phase out for individuals with adjusted gross incomes over $75k ($150k for marrieds) whereby the payment will be reduced by $5 for every $100 above the applicable threshold. These payments are to be sent automatically and should be received in April or May of 2020.
Nonresident aliens, individuals who are dependents of someone else, estates and trusts are not eligible for the payment.
These payments will be based on either 2019 or 2018 income tax filings. This is technically an advance payment on a special credit which will appear on your 2020 income tax return. This special credit will actually be determined based on your 2020 income tax filing so if you don’t qualify for the credit in 2020 but you received the advanced payment based on your prior year’s filing, you will ‘repay’ the credit as part of your 2020 return. Conversely, if you didn’t get a payment based on your prior year’s filing, you will receive it as part of your 2020 filing.
EXTENSION OF TAX DEADLINE AND OTHER EXTENDED DATES
As most people are aware the Federal Government has extended the due date for filing 2019 income tax returns from April 15 to July 15, 2020.
Also extended is the deadline to pay the first quarter estimate of 2020, this is now July 15, 2020. The Act HAD NOT changed the due date of the second quarter estimated payment. It was still due June 15, 2020. This has since been corrected so the second quarter estimate is now due July 15 as well. This means that any balance due for 2019, the 1st and 2nd quarter estimates for 2020 will all be due on the same date-July 15, 2020.
IRS also provided guidance that the due date for IRA, HSA, Archer Medical Savings Account and Coverdell Education Saving Account (ESA) contributions will also be July 15, 2020. As a practical matter, if making these contributions between April 15 and July 15, you will want to clearly indicate this to the custodian of the account. Since inception of these various accounts, IRS has never extended the time to contribute so custodians may not record the contribution to the correct period. It would also be a good idea to verify this afterwards.
IRS has some FAQs on its website which may be helpful. A couple of the more relevant items follow:
Generally, relief does not extend to returns or deposits normally due after April 15 but before July 15 unless specifically noted in IRS notices 2020-18, -20, and -23. Be aware more modifications may be forthcoming.
Relief does not apply to the filing of information or payroll tax returns such as 1099s, 1098s, 941s and 945s and payroll tax deposits not specifically identified in the Act.
Not all states have revised their due date to conform with the Feds. The exceptions most notable to our clients are Virginia (payments extended to 6/1 BUT not returns), Idaho (extended to 6/15), and Iowa (extended to 7/31). Check with your state to be sure.
OTHER IRS ITEMS TO NOTE
IRS has suspended payments due under existing installment agreements due between April 1 and July 15, 2020. According to IRS, they will not default any Installment Agreements during this period, but interest will continue to accrue.
For the period of April 1 to July 15:
Liens & Levies initiated by field agents will be suspended.
New automatic liens & levies will be suspended
The Offers in Compromise (OIC) Office will be working on a limited basis with much of the activity suspended until after July 15.
Passport Certifications to the State Department will be suspended for delinquent taxpayers.
Generally, no new Field, Office or Correspondence audits will begin during this period as well as no ‘in person’ meetings. IRS personnel will still be working on existing cases.
We have become aware of an increase in scamming activity. Please remember that no one affiliated with the IRS will call you directly. Initial contact is in writing. Additionally, unless the contact is initiated by you, IRS personnel will never ask you for identifying personal information and under no circumstance would demand immediate payment of any kind.
PREMATURE DISTRIBUTIONS FROM IRAs
The 10% penalty for early withdrawals from IRAs and qualified plans will be waived if the withdrawal is for coronavirus-related purposes. Distributions must be less than $100k. This is a waiver from the penalty and NOT the tax. The tax would be spread out over a three-year period. Additionally, these withdrawals could be recontributed back into the plan without affecting the current years’ contribution cap.
A coronavirus related purpose is one in which the individual, spouse or dependent is diagnosed with the coronavirus, or suffers adverse financial consequence due to being quarantined, furloughed, laid off, reduction in hours, closing or reducing business owned or operated by that person due to the coronavirus, or other factors to be determined by the Department of Treasury.
This hardship will be self-certifying meaning the that administrator can accept the beneficial owner’s (or participant’s) attestation that the distribution is for a coronavirus related purpose.
With respect to IRAs, this new hardship provision will be applied to all IRAs as of March 27, 2020. With respect to Qualified Plans, this provision may, or MAY NOT be adopted by the individual plan so you will need to check with the administrator of your plan.
LOANS FROM CERTAIN QUALIFIED PLANS
Some retirement plans including many 401k have borrowing provisions. These borrowing provisions have been enhanced. The borrowing limit has been increased from $50k or 50% of the vested interest in account to $100k up to 100% of the vested interest in the account for any loan taken within 180 days of the enactment date.
Additionally, all loan payments due between the enactment date and December 31, 2020 can be suspended for one year.
Each specific plan may, or MAY NOT adopt the above provisions so you will need to check with your plan administrator as to whether these model provisions will be adopted.
WAIVER OF RMDs
The required minimum distribution requirement has been waived for 2020. This includes RMDs to be paid by April 1 for taxpayers turning 70 ½ in 2019.
The waiver of RMDs also applies to beneficiaries of both Traditional and Roth IRAs
Non-designated beneficiaries of IRAs subject to the five-year rule now have one more year until December 31, 2021.
If you have already taken your RMD for 2020, as of this writing, only distributions that have been made less than 60 days ago can be re-deposited avoiding tax. Essentially, this falls under the 60-day rollover provision. The other caveat is that you cannot have executed a 60-day rollover in the last 12 months as you are only allowed one in any 12 month period. Treasury may provide additional guidance on how to repatriate RMDs taken during the first several months of 2020.
Up to $300 of charitable contributions will be allowed whether a taxpayer itemizes his deductions or not. Additionally, the 50% of adjusted gross income limitation is waived for 2020.
EXCLUSION FOR EMPLOYER PAYMENT OF STUDENT LOANS
This provision allows an employer to provide a student loan repayment benefit to employees on a tax-free basis. The employer can pay up to $5250 annually and such payments would be tax free to the employee. This provision applies to loan payments made by the employer from March 27 through December 31, 2020.
EMPLOYER & SELF-EMPLOYED INDIVIDUAL DEFERRAL OF PR TAXES
Employers & SEs can defer the employer portion of employment taxes during the deferral period. 50% of the deferred taxes would be due December 31, 2021 with the other 50% coming due December 31, 2022. There will be no penalty for failure to make timely deposits and the deferral period is from April 1 to December 31, 2020.
NOL RULES RELAXED
Currently only 80% of Net Operating Losses (NOL) can be utilized to offset current earning and NOLs can only be carried forward. The Act relaxes these rules. First, NOLs from 2018, 2019 & 2020 can be carried back for five years. Lastly, the 80% carryforward limit on use is temporarily suspended so that NOLs can fully offset income.
LIMITATION ON INDIVIDUAL’S USE OF BUSINESS LOSSES
Under the major tax revision enacted for years beginning after 2017 in the Tax Cuts and Jobs Act (TCJA), non-corporate taxpayers net business losses were limited to $250k ($500 for marrieds). The CARES Act would allow the use of business losses without limitation for 2018, 2019 & 2020.
BONUS DEPRECIATION ALLOWED ON QUALIFIED IMPROVEMENT PROPERTY (QIP)
Due to a drafting error in TCJA certain improvements primarily made in the Restaurant and Hospitality industries to improve facilities was only eligible to be depreciated over 39 years. The CARES Act corrected errors and specifically allows bonus depreciation to be taken on this property retroactive to 2018.
For Corporate taxpayers to 10% income limitation for charitable contributions is increased to 25%.