Puzzled about handling business taxes on coronavirus relief payments? Experts offer tips ahead of the July 15 deadline

Among the many uncertainties resulting from the coronavirus-related economic slowdown, a variety of tax changes have individuals and those in the business community concerned about new rules and modifications that can make a difference when filing returns this year.

To help address these issues, BPM LLP tax experts discussed a number of critical tax provisions in an hour-long webinar at the beginning of the second quarter and shared insights on economic relief opportunities and resources available to businesses under the CARES Act. They cautioned that while some code changes are known, other concerns have yet to be resolved. This report reflects known tax law changes as of April 2.

Before beginning, BPM stated this information is not intended to be written advice concerning one or more federal tax matters subject to the code of conduct requirements of Treasury Department Circular 230. It stated that topics discussed are of a general nature and are based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with a tax adviser.

Julie West, BPM partner and chair of the corporate tax practice, moderated the webinar “Tax Implications of COVID-19 and Economic Relief Opportunities.” Panelists included Andre Shevchuck, BPM partner, specialized tax services; Bob McGrath, BPM director, private client services; John Hayashi, BPM managing director, SALT (state and local taxes); and James Su, BPM managing director, tax.

Tax return filing and payment deadlines

Hayashi said not all state and local tax deadlines for filing tax returns and paying tax due have been extended to July 15, but most have. Tax payment extensions to July 15 are independent of tax filing extensions, but in general, states are following the federal July 15 deadline. While California has extended the deadline for first quarter individual estimated tax payments to July 15, some states have not – like Oregon, Illinois and the District of Columbia.

Hayashi cautioned filers to be sure to check if the extension is automatic or has to be requested. For example, in Washington state, monthly filers of business and occupation (B&O) tax returns must request an extension, but the deadline for the quarterly deadline is automatically moved to June 30, and for annual filers it is automatically moved to June 15.

He also warned that a lack of uniformity in state laws about extending deadlines will create major confusion requiring a specific check of the law for 100% certainty of the applicable law.

“Don't confuse return filing deadlines with payment extensions. Each must be extended by taxing jurisdictions. If deadlines are missed, be sure to gather the documentation to request an abatement of penalties and interest in a timely manner. Also be sure to understand the source of the extension. Was it by executive action, legislative action or administrative action? It might make a difference.”

In California, Governor Gavin Newsom directed the Franchise Tax Board and the California Department of Tax and Fee Administration to waive any penalties caused by compliance with coronavirus orders. Those agencies have the final say when it comes to waiving penalties and are not legally bound by the governor's executive order.

Hayashi also warned that “States are going to need to balance their budgets and address reduced cash flow in future months, so changes to the law will continue to be fluid and uncertain going forward, so it is probably best to expect more changes than we have already experienced.”

Due to the large number of employees working from home, nexus and apportionment rules will be a focal point for administrators and preparers, according to Hayashi.

“Will employees working in a different state from their home office create nexus in their home state for their employer? Will new work locations for employees impact apportionment results that include a payroll factor.”

Generally speaking, sales tax nexus is the connection between a seller and a state that when created, requires the seller to register, collect and remit sales tax on sales made into the state. Certain business activities, such as having a physical presence in a jurisdiction or exceeding an economic nexus sales threshold, may establish nexus with the state for a taxpayer.

As of April 1, 2019, retailers located outside of California were required to register with the CDTFA to get a seller's permit if newly created economic thresholds for sales volume, or the number of California transactions were exceeded.

Effective April 26 , California amended their April 1 thresholds to consider retailers who exceed $500,000 in annual sales of tangible property to have economic nexus, while eliminating the number of California transactions threshold. These sellers are obliged to collect sales taxes from their California buyers when the new economic nexus threshold for sales only is exceeded.

Payments to employees

Panelists on the webinar discussed how to handle taxes on relief payments to workers under the Emergency Paid Sick Leave Act (EPSL) and the Emergency and Family Medical Leave Act (EFMLA). Both are provisions of the Families First Coronavirus Response Act (FFCRA) which, in turn, is part of the comprehensive Corona Virus Aid, Relief, and Economic Security Act (the CARES Act).

“Internal Revenue Code Section 139 provides that ‘qualified disaster relief payments' made by an employer to an employee are excluded from gross income and are not subject to any federal payroll taxes,” said West.

These payments are generally defined as any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster, provided that such expense is not covered by insurance or otherwise compensated or reimbursed.

She pointed out that examples have not been provided by the IRS or U.S. Treasury. So it to be determined whether one could possibly include medical expenses, over the counter expenses (such as hand sanitizer?), as well as childcare, tutoring, transportation, etc.

West said the CARES Act, enacted on March 27, specifies that employers may contribute up to $5,250 tax free toward the student loans of employees under a non-discriminator arrangement, but that BPM is waiting further clarification and guidance from the IRS regarding Section 139.

“Starting April 1st, if your company has less than 500 employees and you are providing sick pay to employees who are experiencing symptoms of the virus or are under quarantine, the credit for these individuals is calculated by the amount of sick pay they are receiving capped at $511 per day for up to 10 days for a maximum credit of $5,111 per employee,” Shevcuck said. “If you are paying an employee sick pay because they are caring for someone else who is subject to quarantine or are caring for their child because of a school closure, the credit for these individuals are calculated by the amount of sick pay they are receiving capped at $200 per day for up to 10 days for a maximum credit of $2,000 per employee.”

He said the CARES Act provides payroll tax relief in the form of “retention credits,” which are different from the EPSL and EFMLA credits in that these credits are computed by taking the amount of qualified wages paid from March 13th through the end of the year.

“You will need to compute qualified wages, which are the wages paid to your employees subject to a 50% limitation with a maximum of $5,000 in credit per employee. The eligibility of ‘qualified wages' differs when you have more than 100 employees.”

Shevchuck said, “It is worth noting that if you receive a forgivable loan through the SBA's Paycheck Protection Program (PPP), you may not claim ‘retention credits' defined by the CARES Act.” (on June 4, the IRS announced use of PPP funds expanded from 25% to 40% for leases, mortgages and equipment leases).

Business tax implications

West noted modifications to these rules have been made, including allowing a five-year carryback for Net Operating Losses arising in years 2018, 2019 or 2020, and that the 80% limitation has been removed. Companies which paid tax in years 2013-2017 may amend returns for previous profitable periods and receive cash refunds.

Action on this modification may recover cash at a 35% rate (pre-2018) instead of an offset on future tax at 21% rate (post-2018). A fix is also available for fiscal year end filers. Filers with fiscal years ending after 12/31/17 were not allowed a carryback. However, now they qualify, but must file amended returns within 120 days of the date of enactment.

Prior year alternative minimum tax credits

West said the prior year AMT carryforward, previously available for 2017 to 2022, was limited to 50% of the minimum tax credit over the allowable credit. The CARES Act accelerates this provision such that all minimum tax credit is available in 2018 or 2019. It is now possible to claim remaining credit on the 2019 return or file an amended 2018 return with Section 53(e)(5) ­- credit for prior year minimum tax liability - election by Dec. 31 to receive the benefit.

Business interest limitations

IRS Section 163(j) limits interest to 30% of taxable income (with adjustments) for the year. The CARES Act increases this limitation to 50% of taxable income for 2019 and 2020. Filers can realize an additional benefit in that they may use 50% of 2019 income to calculate the 2020 limit to increase the deduction on the 2019 return or file an amended 2018 return with an increased deduction, according to West.

If an increased deduction leads to a larger net operating loss, this is also eligible for carryback. Filers can carry this back five years, without the 80% limitation, to recover taxes paid in prior years.

Corporate charitable contribution

A company's charitable contributions for cash or food, were previously limited to 10% of taxable income. The CARES Act increases this limitation to 25% of taxable income for 2020. Thus, companies which make donations of cash or food to qualified organizations in 2020 will receive a larger than usual deduction.

Tax provision implications

West observed that under ASC740-10-45-15 (the Accounting Standards Code regarding other assets and deferred costs) companies should include the effects of any tax law changes in the financial statement period including March 27, the date of enactment (e.g. 3/31/20 for interim financial statements).

West listed several factors to consider, including:

Record changes in payable/receivable carryback or acceleration of prior-year alternative minimum tax;

a rate change in Deferred Tax Assets (DTA) for a 35% carryback;

changes in DTA (used for carryback or PY AMT credit acceleration;

changes in the assessment of realizability of assets (valuation allowance);

changes in available sources of taxable income (e.g. “naked” credits against 80% Net Operating Loss (NOL) DTAs;

payable changes (expanded interest deduction and charitable contributions).

These changes should not be reflected in the income tax provision for period ending prior to the date of enactment (e.g. 12/31/19) financial statements. Companies should qualify for the expected impact of the CARES Act and consider whether the effects are significant enough to warrant a disclosure for prior periods (e.g. 12/31/19).

Qualified improvement property (QIP) update

Su explained that the 2015 PATH Act (Protecting Americans from Tax Hikes) created QIPs to expand the types of property eligible for bonus depreciation. This was intended to incentivize improvements to existing buildings not already covered under Qualified Leasehold Improvement, Qualified Restaurant or Qualified Retail Improvement Property (QLI, QRP, QRI).

Qualified Improvement Property includes interior improvements to a building that is a QIP; non-residential real property and placed into service after a building was originally constructed. However, QIP excludes improvements to building structure, elevators and building enlargement. Eligibility for QIP is not subject to a lease between unrelated parties, and the three-year rule does not apply.

By passing The Tax Cuts and Jobs Reform Act (TCJA) in 2017, Congress inadvertently nullified the tax benefits of QIPs. The CARES Act now fixes the TCJA technical error by assigning QIPs a 15-year recovery period and making them eligible for first-year bonus depreciation. It retroactively applies these corrections back to TCJA 2017, creating an opportunity to go back into prior years to claim missed depreciation not already taken. Su remarked that recent changes to bonus depreciation do not apply to California tax depreciation, since the state has not historically conformed to federal depreciation rules.

The impact of these changes is broad and can benefit taxpayers in both real estate and non-real estate industries. The 100% bonus depreciation for QIPs could provide immediate tax benefits to anyone who made improvements to a building over the last two to three years. For QIPs placed into service in prior years, changes in depreciation can be recovered by filing an automatic accounting method change, or by amending a prior year's tax return.

Su further noted that the benefits of QIPs do not conflict with or nullify the benefits traditionally associated Cost Segregation studies. Cost Segregation studies benefit from identification of personal property. For QIP, benefit is derived from the identification of eligible real property. As such, the two planning ideas can be applied hand-in-hand as one effective tool for reducing tax liability.

Cash payments to individuals

McGrath recapped CARES Act benefits including cash payments of up to $1,200 for single individuals and $2,400 for married joint filers, plus up to $500 for each dependent child under age 17. These payments will phase-out beginning at $75,000 for single and $150,000 for married joint filers - by $50 for each $1,000 over the phased-out threshold, and fully phased-out (for those without child dependents) at $99,000 single and $198,000 for married joint filers.)

Payments are determined by information from 2018 (or 2019) IRS Form 1040 or Social Security Administration data. A refundable credit is eligible to be claimed on 2020 tax returns if the payment received is less than if based on 2020 income and dependent information.

According to McGrath, the economic impact payments are really an advance of a refundable credit based on information from the taxpayer's 2020 tax return.

Those 2020 tax returns will not be filed until early 2021 at the earliest, but the CARES Act calls for the payments to be made as soon as possible using information from prior year returns or on file with Social Security.

“It is clear from the legislation that if the payment received is less than the amount using the 2020 tax return information, the taxpayer will receive the difference as a refundable credit on their 2020 tax return. What is less clear in the legislation is what happens if the payment received is greater than the amount determined based on the 2020 tax return information,” McGrath added.

The legislation does not provide a mechanism to repay any amounts overpaid.

Based on IRS guidance, including frequently asked questions posted to its website, it appears that if the economic impact payment actually paid is greater than the amount computed on the taxpayer's 2020 tax return, the payment recipient will not be required to pay back any excess or recognize income for the “overpayment.”

After payments are made, Treasury/IRS will contact recipients with information on the amount, when, and in what form (check, direct deposit, or prepaid debit card) these payments will include. This letter will provide information on how the payment was made and how to report any failure to receive the payment.

Access to retirement plan fund

Coronavirus-related distributions of up to $100,000 during 2020 from IRAs or other qualified plans are not subject to the 10% early withdrawal penalty.

This applies to individuals (including spouse or dependent) diagnosed with COVID-19 or if adverse financial consequences occur, including a furlough, being laid off, reduced work hours or lack of childcare. This distribution is not taxable if repaid within three years.

The distribution is taxable if not repaid, but income is recognized over three years beginning in 2020.

Limits have been increased on the amount that can be borrowed from employer-qualified plans (not IRAs) from March 27 through Sept. 22 and up to $100,000 (up from the lesser of $50,000 or 50% of the vested balance). In addition, outstanding borrowings with repayment dates from March 27 through Dec. 31 have the repayment date extended for one year.

Modification of limitation on losses for noncorporate taxpayers

McGrath summarized a series of changes to TCJA rules, such the suspension for 2018, 2019 and 2020 of excess business loss provisions for individuals (including trusts and estates).

Under TCJA, business losses in excess of $250,000 (single person) or $500,000 (for married joint filers) could not offset other income and were deductible in future years as Net Operating Losses. This means there is potential for amended returns for 2018 or 2019 to claim refunds.

Furthermore, technical corrections have been made to TCJA provisions applicable for 2021+, including the fact that wages are not considered to be business income, and clearer rules have been stated on how business capital gains and losses are taken into account in computing the excess business loss, if any.

The tax team at BPM LLP advises readers to stay up-to-date on all of the overwhelming COVID-19 changes in the law by visiting the BPM COVID-19 Resource Center to navigate everything from new tax law changes to operational and employee support established by federal law.