COVID-19 Tax Related Provisions Affecting You and Your Business
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As a result of the Coronavirus pandemic, both the federal and state governments have issued numerous laws, regulations and proclamations. The following is a brief summary of the tax related provisions mainly contained in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted on March 27, 2020, but also briefly summarizes tax-related provisions contained in other Coronavirus-related laws, regulations and proclamations. AS ALWAYS, THIS SUMMARY IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS, AND DOES NOT CONSTITUTE, LEGAL OR ACCOUNTING ADVICE. IT IS IMPORTANT THAT TAXPAYERS CONSULT WITH THEIR OWN TAX ADVISORS FOR GUIDANCE ON THEIR SPECIFIC INDIVIDUAL OR BUSINESS TAX PLANNING AND REPORTING RESPONSIBILITIES.
TAX PROVISIONS CONTAINED IN THE CARES ACT
Individual Tax Rebates
Eligible individuals will receive a check for $1,200 ($2,400 if married filing joint) plus $500 for each qualifying child (under age 17 at the end of 2019). Individual taxpayers with adjusted gross income up to $75,000 ($150,000 married filing joint, and $112,500 head of household) will receive full payment. For taxpayers with adjusted gross income above those amounts, the payment amount is reduced by $5 for each $100 above the applicable threshold amounts above. The rebate amount is completely phased-out for single filers with adjusted gross income exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for married filing joint filers with no children. For taxpayers who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those taxpayers who have not yet filed their tax return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment.
Employee Retention Credit
The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that “Eligible Employers” pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. Eligible Employers for purposes of the Employee Retention Credit are those that carry on a trade or business during the calendar year 2020, including a tax-exempt organization, whose (i) operations were fully or partially suspended, due to a COVID-19 related shut down order, or (ii) gross receipts declined by more than 50% when compared to the same quarter in the prior period. Self-employed individuals are not eligible for this credit for their self-employment services or earnings. Employers can seek refunds when the qualified sick leave and qualified FMLA leave payments exceed the 941 taxes by filing IRS Form 7200. The IRS expects to process these refunds in two weeks or less. For an employer with over 100 employees, the calculation only includes wages for employees who are not working. For an employer with 100 employees or less, the calculation includes wages for all employees. If the employer claims the FFCRA credits (discussed in detail later) for mandatory sick leave and/or family leave, the wages associated with the FFCRA credits are not eligible as qualified wages for the Employee Retention Credit. This prevents both credits from applying to the same wages paid by an employer. In addition, the Employee Retention Credit does not apply if an Eligible Employer receives a Paycheck Protection Program Loan.
Deferral of Employer Payroll Tax Payments
Employers and self-employed individuals may defer payment of the employer’s share of the social security tax they otherwise are responsible for paying to the federal government with respect to their employees for the period beginning March 27, 2020 through December 31, 2020. This provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half paid by December 31, 2022. Employers are not eligible to defer if they have debt forgiveness under the Payroll Protection Program.
Net Operating Losses
Net operating losses originating in 2018, 2019 and 2020 can be carried back for five (5) years. This provision removes the 80% of taxable income limitation to allow net operating losses to fully offset other taxable income until 2021. These changes will allow companies to utilize losses and amend prior year tax returns, which will provide critical cash flow and liquidity.
The corporate alternative minimum tax (“AMT”) was repealed as part of the Tax Cuts and Jobs Act (“TCJA”), but corporate AMT credits were made available as refundable credits over a four year period from 2018 to 2021. This provision accelerates the ability of companies to recover those AMT credits in 2018 or 2019, permitting companies to claim a refund now and obtain additional cash flow.
Business Interest – Corporations
For taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of adjusted taxable income (“ATI”), an increase from 30% of ATI under the TCJA. For any taxable year beginning in 2020, the taxpayer may elect to substitute the ATI for the last taxable year beginning in 2019 for the 2020 ATI.
Business Interest – Partnerships
For 2019 tax returns, the 30% limit still applies. However, 50% of any interest limitation incurred in 2019 is deductible in 2020. Any partner can elect out of this special 50% rule. For 2020 tax returns, taxpayers may deduct business interest expense up to 50% of ATI. The partnership may elect to substitute the ATI for the last taxable year beginning in 2019 for the 2020 ATI.
Qualified Improvement Property
This was a technical correction to an error in the TCJA. This provision allows businesses to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year useful life of the building. The term “qualified improvement property” has been amended to mean “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” Examples of such qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing. Specifically excluded improvements are internal structural framework, enlargements to the building, and elevators or escalators. The correction is retroactive back to January 1, 2018 acquisitions.
Use of Retirement Funds
The IRS has waived the 10% early withdrawal penalty for up to $100,000 of distributions after January 1, 2020 related to COVID-19. The income on such distributions will be taxable over three (3) years. The taxpayer can also recontribute the funds to an eligible retirement plan without regard to the annual contribution limits. The IRS has also waived required minimum distribution rules for 2020.
The CARES Act expands charitable contribution deductions. Individual taxpayers can take a deduction for up to $300 of cash contributions in 2020 whether they itemize their deductions or not. The corporate charitable contribution limitation for 2020 has been increased from 10% to 25% of taxable income.
Individual Business Losses
The $500,000 cap on individual business losses has been suspended until the 2021 tax year.
FAMILIES FIRST CORONAVIRUS RESPONSE ACT (“FFCRA”)
The FFCRA was signed into law on March 18, 2020. The FFCRA provides paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employees. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the FFCRA. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances. Under the FFCRA, Employers receive 100% reimbursement for paid leave pursuant to FFCRA. Health insurance costs are also included in the credit.
Paid Sick Leave Credit
For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.
For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
Child Care Leave Credit
In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
Eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS. The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees. If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able to file IRS Form 7200 to request an accelerated payment from the IRS.
Federal Income Tax
The deadline for both income tax filings and payments has been pushed back from April 15, 2020, until July 15, 2020. This deferral applies to income taxes as well as estimated income tax payments. However, individuals expecting a tax refund are being encouraged by the IRS to file their return as soon as possible in order to receive their refund sooner.
State Income Tax
The Louisiana Department of Revenue (“LDR”) has issued guidance to provide filing and payment extension relief for income and franchise tax returns and payments. The following income and franchise tax returns and any payments due with the returns has been extended to July 15, 2020:
|2019 LA Form Description
|New Due Date
|Resident Income Tax Return
|July 15, 2020
|Nonresident/Part-Year Resident Income Tax Return
|July 15, 2020
|Consumer Use Tax Return
|July 15, 2020
|Partnership Return of Income
|July 15, 2020
|Composite Partnership Tax Return
|July 15, 2020
|2019 Corporation Income and 2020 Franchise Tax
|July 15, 2020
|Fiduciary Income Tax Return
|July 15, 2020
This is an automatic extension and no extension request is necessary. No penalties or interest will be assessed provided that the return and payment are submitted to the Department of Revenue by the July 15, 2020 extension date.
It is important to recognize, however, that estimated tax payments are not included in this relief. In Revenue Ruling 20-002, the LDR clarified that first and second quarterly payments remain due on April 15 and June 15, respectively. If a taxpayer is required to remit estimated tax payments, but fails to do so, the Underpayment of Estimated Tax ("UET") penalty is added to the tax due. Louisiana law provides no mechanism for the LDR to extend the due date of estimated income tax payments by individuals. However, in consideration of the extraordinary circumstances caused by the coronavirus pandemic, the LDR announced safe harbor procedures for taxpayers to avoid the imposition of UET. See Revenue Ruling 20-002. The LDR will automatically waive any UET penalty otherwise due for April 15 and June 15, 2020 estimated payments provided the following criteria are met:
- The taxpayer pays the April 15 and June 15, 2020, estimated payments timely.
- The amount paid on the April 15, 2020, estimated payment is at least 90% of the amount paid on the April 15, 2019 estimated payment.
- The amount paid on the June 15, 2020, estimated payment is at least 90% of the amount paid on the June 17, 2019 estimated payment.
Revenue Ruling 20-002 confirms that the same UET penalty waiver is available for fiscal year taxpayers. Fiscal year taxpayers must follow the same criteria stated above but substitute the first and second estimated income tax payment due dates as appropriate based upon the taxpayers' taxable year.
Louisiana Unemployment Taxes
The payment deadline has been extended but not the filing deadline. On March 19, 2020, the Louisiana Workforce Commission (“LWC”) announced a deferral for payment of first quarter state unemployment taxes. Employers will still be required to make appropriate filings by April 30, 2020, but any payments associated with unemployment taxes will be deferred until June 30, 2020. In the announcement, LWC also clarified that an employer’s unemployment insurance experience tax rate will not be impacted by claims related to COVID-19.
Louisiana Sales and Use Taxes
The February 2020 sales tax returns and payments were originally due on March 20, 2020. The filing and payment deadline for the February 2020 sales tax period is extended to May 20, 2020. This is an automatic extension and no extension request is necessary. The Louisiana Department of Revenue will waive delinquency penalties and compromise interest associated with delinquent sales tax remittances as long as the return and payment are received by the extended due date of May 20, 2020. Taxpayers cannot utilize the Parish E-File or Sales Tax Online filing systems to take advantage of this filing and payment extension relief. Sales tax returns and payments must be submitted via LaTAP or by paper filing. All electronic filing and payment mandates contained within Title 61 of the Louisiana Administrative Code relative to sales tax are temporarily suspended. No penalties will be assessed for a taxpayer’s failure to file a sales tax return electronically or remit sales tax by electronic funds transfer.