2020 In Review - Individual
DECLARATION OF A DISASTER
After the confirmation of the first coronavirus case in the United
States, the Secretary of Health and Human Services (HHS) declared
a public health emergency on January 31, 2020.
On March 13, 2020, President Trump declared a nationwide
emergency under the Stafford Act, which meant that governors
would not need to request individual emergency declarations to
get federal assistance. The federal declaration proclaimed the
COVID-19 outbreak a national emergency. All 50 states, the District
of Columbia, and four territories were approved for major disaster
aid. Additionally, 32 tribes would work directly with the Federal
Emergency Management Agency (FEMA) under the declaration.
Declaring the entire country a disaster area affected by COVID-19
produces a number of federal tax consequences under the Internal
Revenue Code (“IRC” or “Code”):
X The Treasury Secretary becomes empowered under IRS to
provide up to one year of relief for the filing and payment
of certain taxes.
X Personal casualty losses in a disaster area are eligible
to be deducted.
X Losses related to a disaster are eligible to be deducted, at the
taxpayer’s election, in the year prior to the year of the loss.
X Amounts paid as Qualified Disaster Relief Payments can
be excluded from the income of the recipient.
The Families First Coronavirus Response Act (FFCRA) requires that
all comprehensive health insurance plans cover FDA-approved testing
needed to detect or diagnose COVID-19, including in-person or
telehealth visits to a doctor’s office, urgent care center, or emergency
room, which eliminates co-pays or deductibles for testing. The
Coronavirus Aid, Relief and Economic Security (CARES) Act extended
this requirement to cover certain non-FDA-approved testing.
The IRS then issued relief providing for a deferral for filing tax
returns and payments of tax. As a result, the deadline to file and
pay income taxes, including the first quarterly estimated tax, was
extended to July 15 without limitation and applied to all taxpayers.
Subsequently, the Treasury expanded the deferral to include the
second quarterly estimated tax, if normally due before July 15,
and other “time sensitive acts” including making section 83(b)
elections, completing like-kind exchanges, involuntary conversions,
gain rollovers, and contributions to IRAs or health savings accounts.
The TCJA suspended, for tax years 2018 through 2025, the
deduction for personal casualty losses. However, an exception
applies allowing a personal casualty loss deduction for these years
for such losses which are “attributable to a federally declared
disaster.” The Presidential declaration effectively makes the COVID-
19 pandemic a federally declared disaster throughout the country.
However, a question remains concerning how the casualty loss
rules apply to the pandemic. A casualty loss arises from fire, storm,
shipwreck, or other casualty. It normally produces physical damage
to property which is sudden and does not occur over time. As of this
writing, the Treasury and IRS have not issued any guidance as to the
application of the casualty loss rules in relation to the coronavirus.
The Internal Revenue Code provides that losses otherwise allowed,
which occur in a “disaster area” and are “attributable to a Federally
declared disaster,” can be deducted, at the taxpayer’s election,
in the year prior to the year of loss. This means that a COVID-19-
related loss may be taken on a 2019 return. Given the impact of
the virus on 2020 earnings, 2019 may produce a better tax result
since the deduction could offset income taxed at a higher rate.
Additionally, taxpayers do not need to wait until filing a 2020 tax
return, but can get the benefit of a refund by filing under a quick
refund process.
There are many business losses where this rule would also seem
to apply, including abandonment of leasehold improvements due
to closure of a business location, selling off excess and unsaleable
inventory due to the lack of demand, contract cancellation
payments, and loss of nonreturnable deposits. If you or your
business are experiencing losses in 2020, review the facts to
determine if these rules apply.
The Code allows employers to make “qualified disaster relief
payments” on a tax-free basis to the recipient. This was intended to
permit a payer, generally an employer, to provide resources to cover
certain costs, including:
i) To reimburse and pay reasonable and necessary personal,
family, living or funeral expenses incurred as a result of a
qualified disaster;
ii) To reimburse or pay reasonable and necessary expenses
incurred in the repair or rehabilitation of a personal
residence or replacement of its contents, to the extent
the need for such repair, rehabilitation, or replacement is
attributable to a qualified disaster.
Prior guidance indicates that an employer can provide deductible
qualified disaster relief to an employee. However, the Service
has stated in Frequently Asked Questions that replacement of
compensation is taxable and does not constitute qualified disaster
relief. The IRS has not issued guidance on which specific expenses
incurred in connection with the pandemic may be deducted or how to
determine if they are “reasonable and necessary.” These may include
costs to help pay for an office in the home or related expenses,
increased medical expenses, and/or increased commuting costs
for employees. A best practice would be for the employer to have a
written policy with an administrative process and restrictions in place
to determine appropriate payments to recipients.
FAMILIES FIRST CORONAVIRUS RESPONSE ACT (FFCRA) CREDITS
Congress passed the FFCRA, creating two payroll
tax credits impacting employers with fewer than 500
employees:
X Emergency Paid Sick Leave – Covered employers are
required to provided covered employees with two weeks
of paid leave (i.e., 10 days) where the employed:
1. Is subject to a federal, state or local quarantine
or isolation order related to COVID-19.
2. Has been advised by a healthcare provider to
self-quarantine.
3. Is experiencing COVID-19 symptoms and seeks
medical diagnosis.
4. Is caring for an individual subject to an order
described in (1) or (2) above.
5. Is caring for a child whose school is closed
or whose childcare provider is unavailable for
reasons related to COVID-19.
6. Is experiencing any other substantially similar
condition specified by the Secretary of Health and
Human Services, along with the Secretaries of
Labor and Treasury.
X Emergency Family and Medical Leave (EFML) – Covered
employers are required to provide up to an additional
10 weeks of job-protected leave to covered employees.
However, the sole reason for which EFML is allowed is
to care for a son or daughter under age 18 if their school
is closed or whose childcare provider is unavailable for
reasons related to COVID-19.
FFCRA cont'd
The law provides certain
exemptions from covered
employer status, including: (a)
a small business with fewer than
50 employees, if the payment would
jeopardize the viability of the business as
a going concern; and (b) certain healthcare
providers and emergency responders.
The FFCRA payments made to employees are funded
through a refundable credit provided to the employer
against payroll taxes, so that this benefit should have no
cost to the employer.
There are various methods for an employer to obtain the credit.
The employer can reduce the amount of federal payroll taxes and
employee income tax withholding to be deposited in anticipation
of receiving the credit. If this reduction does not cover the amount
which is paid to covered employees, the employer can request a
refund for the balance on its quarterly payroll tax return. The IRS
also created new Form 7200 which employers can use to request
an advance payment of the credit.
The law provides that a self-employed taxpayer is eligible for an
equivalent payment as a credit against his/her 2020 income taxes.
Quarterly estimated payroll taxes can be reduced to anticipate the
benefit of the credit.
CARES ACT
In March 2020, Congress enacted
the Coronavirus Aid, Relief and
Economic Security (CARES) Act, which
includes many provisions to assist businesses,
as well as several tax provisions.
Paycheck Protection Program Loans
A key element of the law benefiting businesses was the
creation of Paycheck Protection Program (PPP) loans. This
program was intended to provide a direct incentive for small
businesses to keep workers on the payroll. Under the program,
the Small Business Administration (SBA) will forgive loans where
employee retention criteria are satisfied and funds are utilized for
specific purposes.
These loans have an interest rate of 1% and a maturity date of two
years for loans issued before June 5 and five years for those issued
subsequently. In general, loan payments are deferred for borrowers
who make an application for loan forgiveness and satisfy all of the
requirements. Generally, forgiveness should be requested within 10
months of the end of the borrower’s covered period (either 8 weeks
or 24 weeks) to avoid payments on the loan.
The law specifically states that any amount of PPP loan that is forgiven
is not considered to be taxable income to the borrower. However,
the Treasury has stated that businesses would not be entitled to
a deduction for amounts paid with PPP loan proceeds which are
forgiven. The Service relies on the Internal Revenue Code and
related regulations, which disallow a deduction to the extent that it
is allocable to a class of income that is wholly exempt from federal
income tax. The IRS reasons that the amount received under the PPP
loan is earmarked for the specific purposes designated under the
CARES Act. Use of the funds for these purposes causes the funds to
be nontaxable income and, consequently, these expenses are related
to such exempt income. Lawmakers have stated “…the intent was to
maximize small businesses’ ability to maintain liquidity, retain their
employees and recover from this health crisis as quickly as possible.
This position is contrary to that intent.” The House Ways and
Means Committee Chair announced that Congress intends to fix this
result. While proposals have been issued, we have yet to see if such
language is ultimately passed by Congress.
Currently, businesses are in
a quandary as to how to apply
this Treasury position. Since the
business will probably not know at the
time of filing its 2020 return how much of
the PPP loan has been forgiven, should the 2020
payments be deducted on that return, or should the
taxpayer’s belief that the loan amounts will be forgiven
control? Another option is that the costs may be deductible
in 2020 and become taxable in the year that forgiveness is
approved by the SBA. At this point, we have no guidance from
the Service and may not receive any until Congress passes a new
stimulus bill, which may address the matter.
INDIVIDUAL TAXATION
Cash Stimulus Payment
The CARES Act provided for a cash payment to taxpayers of up to
$1,200 per person ($2,400 for a married couple) and an additional
$500 for each qualifying child. These payments were subject to
phase-out based on adjusted gross income and filing status.
The amount payable to an individual is actually an advance payment
of a credit which is to be determined in 2020. The payments were
based on 2018 tax filings (in some cases 2019), but there is a
“true-up” of the amount payable in 2020, i.e., the correct credit is
determined in 2020 based on that year’s facts and circumstances.
If the taxpayer received an advance that is less than the 2020
calculated credit, the taxpayer is entitled to a credit or refund of the
additional amount. However, if the taxpayer has been overpaid, the
excess amount received is not owed back to the government.
The IRS set up a procedure to obtain information in order to compute
and deliver the cash payment based on the prior year’s tax filings.
Non-filers were able to provide the Service with information via the
“Get My Payment” website using a “Where’s My Refund” tool.
Certain persons are ineligible for the credit – a nonresident alien
individual, a person who is a dependent of another, and possibly,
incarcerated persons. In May, the IRS issued a release noting that
payments may have been made to ineligible persons and requesting
a return of payments. This included payments to anyone who died
before the date of receipt.
Retirement Plan Rules
Required Minimum Distributions:
The CARES Act waived Required
Minimum Distributions (RMDs) for 2020. The Joint Committee on
Taxation Report and IRS Notice 2020-51 confirms that this rule:
X Applies to inherited IRAs, so that 2020 is not counted in
the five-year payout period.
X Waives the 2019 initial RMD payment, which could be
deferred until April 1, 2020.
X Waives the 2020 initial RMD payment, which could be
deferred until April 1, 2021.
However, the 2021 RMD will
have to be made in that year.
Since the CARES Act did not become law until March 27, 2020,
many individuals may have already received their RMDs for 2020
and already be beyond the normal 60-day rollover period to avoid
taxation. To address this, the IRS extended the rollover period for
distributions made before the enactment date to August 31, 2020.
The law generally limits the amount of IRA rollovers to one every 12
months. Given the unusual current circumstances, the Service states
that repayments to an IRA through August 31 will not be considered
a rollover with respect to this rule. This may require changes to be
made to the plan, which can generally be done by the 2022 plan
year (2024 for government plans).
CHARITABLE CONTRIBUTION DEDUCTIONS
The CARES Act makes a couple of significant changes to the
individual charitable contribution deduction for 2020.
First, up to $300 of charitable contributions can be taken as a
deduction in reaching Adjusted Gross Income. This rule applies
only to an individual who does not itemize.
Secondly, the 60% AGI limitation for cash contributions is eliminated
for 2020 for certain qualified contributions. This permits an individual
to contribute up to 100% of his or her income. However, this rule
applies only to cash contributions and not to contributions to certain
non-operating private foundations or donor advised funds.
With the waiver of the required minimum distribution, there is less
incentive for an IRA owner who is 70.5 or older to make a qualified
charitable distribution directly from the IRA to the charity. However,
this may still be an effective strategy to receive the effective benefit
of 100% of the charitable deduction, through the exclusion of the
income. A qualified charitable distribution may benefit someone in a
state like Connecticut, which does not permit a charitable deduction,
but bases its personal income tax on a modified adjusted gross income.