Tax Implications of COVID-19
In the past several weeks, President Trump, Congress, and the Internal Revenue Service (IRS) have taken immediate actions impacting Kansas taxpayers in response to the COVID-19 pandemic. This article summarizes noteworthy changes in tax deadlines and provisions.
Filing and Payment Deadline Extensions
The IRS extended filing and payment deadlines for federal returns from April 15, 2020 to July 15, 2020. This relief extends to income, estate, gift, and generation-skipping transfer tax forms and payments. Quarterly estimated tax payments for the first and second quarters of 2020 are postponed to July 15, 2020. No interest, penalties, or additions to tax for failure to file such returns or pay such taxes will accrue on the deferred filings or payments through July 15, 2020. Further, the deadlines for taxpayers to make IRA contributions for tax year 2019 have been extended to July 15, 2020.
Families First Coronavirus Response Act (FFCRA)
The FFCRA was signed into law by President Trump on March 18, 2020. As a general rule, the FFCRA requires employers with less than 500 employees to provide two weeks of sick leave for certain employees. As an extension of the Family and Medical Leave Act (FMLA), the FFCRA provides for an additional ten weeks of pay for paid family leave for child care. As to employers, the FFCRA provides employers with refundable tax credits against the cost of paying such sick and family leave. The FFCRA applies to wages paid for the period beginning April 1, 2020 and ending on December 31, 2020.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The CARES Act was signed into law by President Trump on March 27, 2020. The CARES Act is comprehensive legislation impacting individual and business taxpayers. Most notably, the CARES Act implemented a one-time cash recovery rebate (i.e. an “economic impact payment”) of $1,200 to individuals and $2,400 to married couples with an additional $500 for each qualifying child, subject to certain limits and phase-outs.
As to retirement withdrawals, the 10% early withdrawal penalty is waived for retirement plan coronavirus hardship distributions of up to $100,000 made after January 1, 2020.
The CARES Act also established the Paycheck Protection Program (PPP). Under the PPP, the Small Business Administration (SBA) offers loans of up to $10 million for qualifying small businesses. Here, eligible borrowers are small businesses with under 500 employees, including sole proprietors, paid independent contractors, other self-employed individuals, and section 501(c)(3) nonprofit organizations. The PPP provides for partial and full loan forgiveness if the borrower uses proceeds for payroll costs, rent, utilities, and interest paid on mortgages.
Businesses which do not participate in the PPP may consider the Employee Retention Credit (ERC). The ERC provides a qualifying employer with a refundable payroll tax credit of up to $5,000 per employee for wages paid from March 13, 2020 through December 31, 2020. Employers may not receive both an SBA loan under the PPP and an Employee Retention Credit.
Other noteworthy tax provisions of the CARES Act include the following:
- Individual taxpayers who do not itemize deductions are entitled to a charitable contribution deduction of $300 for cash contributions made in 2020 to qualifying charitable organizations. This is an above-the-line deduction used to calculate an individual taxpayer’s adjusted gross income (AGI).
- As to limits on the amount of cash charitable contributions made in calendar year 2020, individual taxpayers who itemize may deduct 100% of qualified contributions, rather than being limited to 60% of the taxpayer’s AGI. Corporate taxpayers may deduct up to 25% of taxable income, rather than being limited to 10% of taxable income.
- The CARES Act temporarily suspends Net Operating Loss (NOL) limits and allows for a five-year NOL carryback period, resulting in additional cash flow and liquidity for taxpayers. Specifically, NOLs generated in taxable years beginning in 2018, 2019 and 2020 may be carried back for up to five taxable years. Further, the limitation of the deduction of an NOL carryforward to 80% of taxable income is delayed until 2021.
- The CARES Act increases the limitation on deductible business interest from 30% of adjusted taxable income (ATI) to 50% of ATI for tax years beginning in 2019 and 2020. For partnerships, the increase only applies to the 2020 tax year.
This summary should not be considered legal advice and does not create an attorney/client relationship. For further details and guidance regarding the provisions contained in this summary, contact the tax and legal professionals at Triplett Woolf Garretson, LLC.