COVID-19 Updates: Things You Should Know

Click on the links below to jump to each section in this article:

• Tax Returns & Estimated Taxes Now Due July 15
• CARES Act: Information for Individual Taxpayers
• Tax Breaks Help Small and Medium-sized Employers
• The Tax-Smart Way to Loan Money to Friends & Family
• Relief for Other Coronavirus-related Tax Issues

Tax Returns & Estimated Taxes Now Due July 15

Due to the coronavirus pandemic, the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020. Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. In addition, the payment and return-filing requirements for gift and generation-skipping transfer taxes due April 15 are now due July 15, matching postponements granted to federal income taxes and returns.

NOTE: Many states have also extended their tax deadlines and payments for a number of taxes in response to COVID-19. Please call for additional information.

Who is Affected?

This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.

No Need to File an Extension

Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief.

NOTE: Individual taxpayers who need additional time to file beyond the July 15 deadline, should file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Businesses who need additional time must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. Don’t hesitate to call if you have questions or need assistance.

File Now for a Refund

Even though the filing deadline has been extended there is no need to wait to file your tax return especially if you are due a refund. Filing electronically using direct deposit is the fastest way to get a refund and most tax refunds are still being issued within 21 days.

The Stafford Act

These extended deadlines are the result of the President’s emergency declaration last week and made possible by the Stafford Act. The Stafford Act, which was enacted in 1988, is a federal law designed to bring an orderly and systematic means of federal natural disaster and emergency assistance for state and local governments in carrying out their responsibilities to aid citizens.

CARES Act: Information for Individual Taxpayers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the stimulus bill that was signed into law on March 27, 2020, contains legislation to stabilize the economy during the coronavirus pandemic. These measures include economic recovery checks for taxpayers, as well as several other tax provisions affecting individuals.

Let’s take a look at a few of the highlights:

Economic Impact Payments

Economic impact payments “recovery checks” will be sent to taxpayers in the next three weeks and will be available throughout the rest of 2020. For most people, they will be distributed automatically and no action is required. Taxpayers might have questions about economic impact payments and answers to some of these questions are provided below.

1. Who is eligible?

Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child.

2. Where will the IRS send my payment?

Most people do not need to take any action. The IRS will calculate and automatically send the economic impact payment to those eligible.

For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.

If the IRS does not have direct deposit information. In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

3. What if I have not filed my 2018 or 2019 tax returns yet?

Anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment and include direct deposit banking information on the return.

If you typically are not required to file a tax return. The IRS will use the information on the Form SSA-1099 or Form RRB-1099 to generate Economic Impact Payments to recipients of benefits reflected in the Form SSA-1099 or Form RRB-1099 who are not required to file a tax return and did not file a return for 2018 or 2019. Each person would receive $1,200 per person, without the additional amount for any dependents at this time and includes senior citizens, Social Security recipients and railroad retirees who are not otherwise required to file a tax return.

Early Withdrawals from Retirement Plans

Taxpayers affected by the coronavirus are able to withdraw up to $100,000 and will not be subject to the 10 percent penalty for early withdrawals. Distributions can be taken through December 31, 2020. The amount withdrawn is considered income, however, and taxpayers have three years to pay the tax on the additional income and replace the funds in-kind. If you need to withdraw funds from a retirement plan, please call a tax and accounting professional to discuss how it could impact your financial situation.

Eligible taxpayer. Anyone who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with the same. In addition, any taxpayer experiencing financial hardship from any of the following situations:

• Quarantined
• Furloughed
• Laid off
• Work hours reduced
• Unable to work due to lack of child care

Required Minimum Distributions (RMDs)

Required minimum distributions are suspended for tax year 2020.

Charitable Deductions

For tax year 2020, there is now an above-the-line charitable deduction of up to $300. In addition, the limitation on adjusted gross income (AGI) for charitable contributions (2020 tax year only) increases to 100 percent of AGI for individuals. Food contribution limits also increase to a maximum of 25 percent.

Questions?

Don’t hesitate to call and speak to a tax and accounting professional today.

Tax Breaks Help Small and Medium-sized Employers

Small and medium-sized employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing coronavirus-related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed into law on March 18, 2020.

NOTE: Subsequent legislation, the CARES Act, includes a provision that delays payment of employer payroll taxes due in 2020 with half due December 31, 2021 and the rest due December 31, 2022.

These same dates and amounts apply to tax owed by self-employed individuals as well with 50 percent due December 31, 2021 and the remaining amount not due until December 31, 2022.

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.

Paid Leave for Workers. Employees receive up to two weeks (80 hours) of paid sick leave (either 100 percent or 2/3 of employee’s pay) and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable due to COVID-19 related reasons. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional 10 weeks of expanded paid family and medical leave.

Child Care Leave Credit

In addition to the paid 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.

NOTE: Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed or child care is unavailable in cases where the viability of the business is threatened.

How It Works

With the goal of “fast funds,” employers will receive an immediate dollar-for-dollar tax offset against payroll taxes. 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. 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. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. 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 a request for an accelerated payment from the IRS.

NOTE: Equivalent credits are available to self-employed individuals based on similar circumstances.

Eligible Businesses

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 Act. Eligible employers can use the funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. Furthermore, employers will be able to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Compliance

Employers are required to comply with the Act within a specified period; however, there is currently in effect, a 30-day compliance period in which enforcement actions against any employer for violations of the Act are subject to 30-day non-enforcement period as long as the employer has acted reasonably and in good faith to comply with the Act. During the 30-day period, efforts will be focused on compliance assistance.

For more information about these credits and other relief, please call.

The Tax-Smart Way to Loan Money to Friends & Family

Offering to lend money to cash-strapped friends or family members during tough economic times is a kind and generous offer, but before you hand over the cash, you need to plan ahead to avoid tax complications for yourself down the road.

Take a look at this example: Let’s say you decide to loan $5,000 to your daughter who’s been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation.

Here’s why:

When you make an interest-free loan to someone, you will be subject to “below-market interest rules.” IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you, and you will need to pay taxes on these interest payments when you file a tax return. To complicate matters further, if the imaginary interest payments exceed $15,000 for the year, there may be adverse gift and estate tax consequences.

Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000, and the borrower doesn’t use the loan proceeds to buy or carry income-producing assets.

As was mentioned above, if you don’t charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e., written agreement with payment schedule), and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan–or the IRS decides to audit you and decides your loan is really a gift.

Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it’s legally binding.

As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.

AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which changes frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.

Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, who in this example is your daughter, cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest–as long as the promissory note for the loan was secured by the residence.

If you have any questions about the tax implications of loaning a friend or family member money, please contact the office.

Relief for Other Coronavirus-related Tax Issues

Relief for taxpayers facing the challenges of COVID-19-related tax issues is now available through the IRS People First initiative. The projected start date will be April 1 and the effort will initially run through July 15, 2020. During this period, to the maximum extent possible, in-person contact will be avoided; however, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations.

Some of the highlights affecting taxpayers include:

Installment Agreements

Existing Installment Agreements. For taxpayers under an existing Installment Agreement, payments due between April 1 and July 15, 2020, are suspended. Taxpayers who are currently unable to comply with the terms of an Installment Payment Agreement, including a Direct Deposit Installment Agreement, may suspend payments during this period if they prefer. Furthermore, during this period, Installment Agreements will not be defaulted on. By law, interest will continue to accrue on any unpaid balances.

New Installment Agreements. Taxpayers unable to fully pay their federal taxes can resolve outstanding liabilities by entering into a monthly payment agreement with the IRS. Please contact the office if you need assistance with this.

Offers in Compromise (OIC)

Several steps are available to assist taxpayers in various stages of the OIC process:

• Pending OIC applications – Taxpayers have until July 15, 2020 to provide requested additional information to support a pending OIC. In addition, any pending OIC request before July 15, 2020, will not be closed without the taxpayer’s consent.
• OIC Payments – Taxpayers have the option of suspending all payments on accepted OICs until July 15, 2020, although by law interest will continue to accrue on any unpaid balances.
• Delinquent Return Filings – The IRS will not default an OIC for those taxpayers who are delinquent in filing their tax return for tax year 2018. However, taxpayers should file any delinquent 2018 return (and their 2019 return) on or before July 15, 2020.
• New OIC Applications – Taxpayers facing a liability that exceeds their net worth can resolve outstanding tax liabilities through “Fresh Start.” Don’t hesitate to call if you have questions about this.

Non-Filers

If you have not filed a return for tax years before 2019, it is in your best interest to file any delinquent returns as you may be owed a refund. More than 1 million households that haven’t filed tax returns during the last three years are actually owed refunds and there is still time to claim these refunds. Once delinquent returns have been filed, anyone with a tax liability should consider taking the opportunity to resolve any outstanding liabilities by entering into an Installment Agreement or an Offer in Compromise with the IRS to obtain a “Fresh Start.” Please call if you need help filing delinquent tax returns.

Field, Office and Correspondence Audits

During this period, generally, no new field, office and correspondence examinations will be started and the IRS will continue to work refunding claims where possible. New examinations may be started, however, where deemed necessary to protect the government’s interest in preserving the applicable statute of limitations.

In-Person Meetings. In-person meetings regarding current field, office, and correspondence examinations will be suspended. Even though IRS examiners will not hold in-person meetings, they will continue their examinations remotely, where possible. Taxpayers are encouraged to respond to any requests for information they already have received – or may receive – on all examination activity during this period if they can do so.

Unique Situations. There may be instances – particularly for some corporate and business taxpayers – where the taxpayers desire to begin an examination while people and records are available and respective staff are available.

General Requests for Information. In addition to compliance activities and examinations, taxpayers are encouraged to respond to any other IRS correspondence requesting additional information during this time if possible.

Help is Just a Phone Call Away

Specific information about the implementation of these provisions is forthcoming; however, if you have any questions or if any of these situations affect you, please call.

DISCLAIMER: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.