Coronavirus – Federal Income Tax Impacts

8 min

In connection with the coronavirus pandemic, the IRS, Congress, and various other government agencies have implemented guidance and legislation or taken actions that may impact your federal income tax position. Below is a summary of the key points to know:

  • Postponement of April 15 Due Dates: All federal income tax returns and income tax payments otherwise due on April 15, 2020 are now due on July 15, 2020. Taxpayers do not need to file a request for extension or any other form to take advantage of this extended due date for filing and payment. No interest, penalty, or addition to tax for failure to file returns or pay tax will be imposed for the period from April 15, 2020 to July 15, 2020 with respect to returns and payments eligible for the postponement. Note that no extension has been provided for non-income tax (including information) returns. Note also that this does not impact the calculation or payment of June 2020 estimated tax payments.
  • Individual Taxpayer Credits: Recently enacted congressional legislation provides for refundable tax credits of up to $1,200 for single filers and $2,400 for joint filers, plus $500 for each dependent child claimed on the return. The amount of the credit is gradually reduced for single filers with income over $75,000 and joint filers with income over $150,000, and phases out entirely for single filers with income over $99,000 and joint filers with income over $198,000. Whether a taxpayer is below the income threshold is determined on the basis of 2019 income, if the taxpayer has already filed a 2019 return, or 2018 income, if the taxpayer has not yet filed a 2019 return. If a taxpayer has filed a 2018 or 2019 tax return, the amounts automatically will be paid out as an advance refund (via direct deposit or a check mailed to the taxpayer's last known address). Treasury anticipates sending these advances within the next few weeks.
  • Charitable Contributions: Recently enacted congressional legislation provides that individual taxpayers can claim up to $300 of charitable contributions as an above-the-line deduction on their 2020 federal income tax returns, if such taxpayers do not itemize their deductions. In addition, the limitations on charitable contributions by individual and corporate taxpayers have been modified to allow for increased deductions. Individuals are now permitted a charitable contribution deduction of up to 100% of their contribution base, up from 60%. Corporations are permitted to deduct up to 25% of their contribution base, up from 15%.
  • Employee Retention Credit: Eligible employers can claim a quarterly employment tax credit of up to 50% of qualified wages of $10,000 paid to each eligible employee. "Eligible employer" means (i) an employer that had to suspend its business during the relevant quarter as a result of a government order limiting commerce, travel, or group meetings due to the coronavirus pandemic or (ii) an employer that saw a year-over-year decline of 50% or more in gross receipts in a particular quarter and continuing until the quarter where gross receipts equal at least 80% of gross receipts in the same quarter of the prior year. For eligible employers with more than 100 employees, qualified wages include wages paid to employees who are not providing services as a result of (i) or (ii). For eligible employers with 100 employees or less, qualified wages include all wages. This provision applies only to wages paid after March 12, 2020 and before January 1, 2021. Note that the credit is not available to businesses that benefit from the tax-free loan provisions described below.
  • Deferral of Payroll Taxes: Generally, 50% of payroll taxes with respect to social security taxes and FICA taxes for the period from March 27, 2020 until December 31, 2020 can be deferred by an employer until December 31, 2021; the remaining 50% can be deferred until December 31, 2022. This provision also applies to self-employed taxpayers who would typically pay the employer portion of such social security taxes, to the extent of such employer portion. Note that the deferral option is not available to businesses that benefit from the forgiveness of tax-free loans made in accordance with the provisions described below.
  • Tax-Free Loans to Businesses: Certain loans granted to businesses and subsequently forgiven under the recently passed Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") will be excluded from taxable income. Under the CARES Act, the government is authorized to loan funds to businesses and subsequently forgive any loaned amounts to the extent such funds are used to cover (i) payroll costs, (ii) mortgage interest payments, (iii) rent payments, and (iv) utility payments for two months from the date of any such loan. Accordingly, taxpayers will not recognize any cancellation of indebtedness income from the subsequent forgiveness of such loans.
  • NOL Adjustments: For net operating losses arising in 2018, 2019, and 2020, certain taxpayers can carry back such net operating losses to the prior 5 taxable years. In addition, the 80% income limit on claiming net operating losses is lifted for certain taxpayers for taxable years beginning before 2021. Note that real estate investment trusts specifically are prohibited from carrying back losses under this rule.
  • Modification of Excess Business Loss Limitation: The Tax Cuts and Jobs Act of 2017 (TCJA) added a provision prohibiting individual taxpayers from claiming a net loss from the taxpayer's aggregated business in excess of $250,000 for single filers and $500,000 for joint filers. Recent congressional legislation has modified this provision so that it applies only to taxable years beginning after December 31, 2020. This legislation also clarifies a few ambiguities left unresolved by TCJA with respect to this provision – specifically, the legislation provides that capital losses, net operating losses, deductions attributable to performing services as an employee, and the qualified business income deduction are not "losses" factored into the excess business loss calculation.
  • Acceleration of Corporate AMT Credit: Corporate taxpayers entitled to an alternative minimum tax credit may claim this credit in 2018 and/or 2019 on an accelerated basis and apply for a refund in connection with such credit, if the refund claim is filed before December 31, 2020.
  • Modification of the Business Interest Deduction Limitation: The TCJA enacted Section 163(j), which limited the ability of certain taxpayers to claim deductions for business interest expenses. Rather than limiting the deduction to 30% of a taxpayer's adjusted taxable income, for 2019 and 2020 the limit is increased to 50%. Note that this increase is subject to additional modifications and requirements if the interest was paid by a partnership in 2019. In addition, a taxpayer can elect to use its 2019 adjusted taxable income as the taxpayer's adjusted taxable income for 2020 (i.e., for 2020, the limit is equal to 50% of the taxpayer's 2019 adjusted taxable income).
  • Alcohol Excise Tax: Recently enacted congressional legislation provides an exemption from excise tax on alcohol if the alcohol is used to produce hand sanitizer in accordance with FDA regulations during 2020.
  • Qualified Improvement Property Correction: Recently enacted congressional legislation also includes a technical correction to the TCJA, which correction allows for certain real estate owners, restaurants, and retail businesses to claim a 100% bonus depreciation deduction with respect to such property.
  • Installment Agreements/Offers in Compromise: If a taxpayer entered into an installment agreement or offer in compromise with the IRS, payments due between April 1 and July 15, 2020 are suspended. The IRS will not default any installment agreements or offers in compromise during this period, but interest will continue to accrue on the outstanding balance. If a taxpayer is working on an offer in compromise with the IRS, such taxpayer will have until July 15, 2020 to provide the IRS with any requested additional information. No offer in compromise requests will be closed before July 15, 2020, unless the affected taxpayer consents.
  • Suspension of IRS Actions: Until July 15, 2020, (i) liens, levies, and seizures will be suspended; (ii) no new accounts will be forwarded to private collection agencies; (iii) no new audits will be commenced; and (iv) passport certifications (which can inhibit a person's ability to obtain a passport) will be suspended. Although new audits are suspended, examinations currently in process will continue on a remote basis. In addition, the appeals office will continue to work cases.
  • Earned Income Tax Credits: The period for providing information to show entitlement to the Earned Income Tax Credit is extended until July 15, 2020. Until July 15, 2020, the IRS will not deny credits for failure to provide such information.
  • Refundable Payroll Credits for Sick Leave and Child Care Leave: In addition to the employee retention credit, there are two other refundable payroll tax credits that relate to an employer's cost of providing coronavirus-related sick leave and/or child care leave. If a business qualifies for these credits, the business can retain funds otherwise payable to the IRS or seek an expedited advance from the IRS.
  • Increased Application of Existing Provisions: In addition to the new guidance and legislation, certain provisions in the existing Code and Regulations may provide some relief for delays caused by the pandemic. Note that these provisions require the affected taxpayer to be located in a federal disaster area, and not all states currently have been declared federal disaster areas.
    • Certain of these provisions exempt amounts from income. For example, certain payments received by an individual as a result of a qualified disaster are excludable from gross income. A qualified disaster includes a federally declared disaster.
    • These provisions may result in automatic extensions of time periods prescribed in the Code and Regulations. For example, the Qualified Opportunity Zone Program generally requires an eligible business to utilize all of its available working capital within 31 months of receipt of such funds. However, if a project is located within a federally declared disaster area, the business can extend the 31-month period by an additional 24 months if the project is delayed because of the disaster.

If you need any assistance navigating the above, Brian O'Connor, Chris Davidson, Liz Stieff, Norman Lencz, Shane Nix, Ilia Katz, and other members of the Venable Tax and Wealth Planning Group can assist. Don't hesitate to contact us with any of your tax needs.