Tax Implications of Coronavirus Aid, Relief, and Economic Security Act

Tax Implications of Corona virus Aid

In unprecedented times like these, the question is between life and death and survival is very crucial. Survival comes with a cost, cost of health services being the major one. The Government is trying to provide health services to the extent possible but considering the severity of the matter, the Government needs to pump more resources in the area of Healthcare services and for that purpose, Tax Collection is an important source. But considering the uncertainty over income and likely increase of unemployment due to shutting down of business activities, the Government needs to be very careful in its Fiscal Policies. This uncertainty is likely to continue until there is a vaccination to COVID-19. Even after the invention of the vaccination, the impact of this pandemic is likely to last long. The Covid-19 pandemic will soon start showing its ripple effect on business and eventually on the economy.

In America, during the time of the Great Depression, in the 1930s, the USA faced more severe economic challenges and it took more than a decade to overcome the crisis. The Great Depression lasted for a very long period majorly due to ineffective fiscal and monetary policies implemented by then PresidentHerbert Hoover who was later replaced in 1932 by President. Franklin D. Roosevelt, who addressed the issue by adopting different Fiscal and Monetary measures. This also did not help much in the economy. The Hoover administration increased the Tax Rates during this period in the hopes to collect more revenue which would be spent on raising the economy. But as the government tried to levy high tax rates on high-income groups, people adopted means to avoid taxes and as a result, fiscal revenue dropped. The Hoover administration also tried to implement high Import Taxes to protect its Domestic manufacturer, but this created an adverse effect on the international economy and finally, world trade could improve only by removing these Import Trade Barriers by Roosevelt Administration. The question remains whether it is fair to compare the current situation of COVID-19 with the Great Depression? Some may be of the opinion that, COVID-19 is a temporary phenomenon and after the introduction of vaccination, the economy will be able to heal very fast. While others are of the opinion that, as the world is fighting an unknown enemy for survival, this situation will have far more reaching effects than the Great Depression in 1929. We leave it to the reader to decide what they feel about this. But nonetheless, whether the situation is like the Great Depression or not, it is of paramount importance that, the Federal Government does not repeat its mistakes of the 1930s and take appropriate fiscal and monetary measures to address the situation.

It has been over a quarter now that the whole is struggling to fight this pandemic. The Federal Government declared the emergency on 13th March 2020 and declared the following economic measures:

Issue of Notices:

Fed issued Notice 2020-17 on 18th March 2020 which gave an automatic extension of Federal Income Tax payments for an Affected Taxpayer which are due on 15th April 2020 to 15th July 2020. This relief is solely for Federal Income Tax payment which includes Federal Income Tax, Federal Estimated Tax Payments, and tax on self-employment income. Federal Tax payments during this extended period will not attract any interest and penalty. This extension was only up to the amount prescribed. But the Fed soon realized that giving the benefit to the prescribed amount of tax may not help so they issued Notice 2020-18 which supersedes Notice 2020-17. By virtue of this Notice 2020-18, there is no limitation on the amount of payment that may be postponed. Fed issued Notice 2020-23 on 9^th April 2020 which amplified the relief provided in 2020-18 Notice. Notice 2020-23 extended due dates of almost all the time-sensitive actions** which fall due between 1^st April 2020 to 15^th July 2020. This notice also postponed due dates with respect to some government actions.

CARES Act and Families First Coronavirus Response Act:

The U.S. Congress passed the Families First Coronavirus Response Act on 14th March 2020 and The Coronavirus Aid, Relief, and Economic Security (CARES) Act on 27th March 2020. This over $2 trillion economic relief package delivers on the Trump Administration’s commitment to protecting the American people from the public health and economic impacts of COVID-19. As per the U.S. Department of the Treasury, The CARES Act provides fast and direct economic assistance for American workers, families, and small businesses, and preserves jobs in American industries. But only time can tell whether this Act achieves its objective or not. So, let us analyze what are the benefits given under both these Acts:

i) Assistance to workers and their families:
The CARES Act provides for Economic Payments to American households of up to $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. But this amount will begin phasing out for taxpayers with adjusted gross income (AGI) above $150,000 for joint filers, $112,500 for heads of households, and $75,000 for other individuals. However, this stimulus rebate will be treated as an advance refund of 2020 tax credit and those who got the benefit of this will have to reduce it from the amount of Tax Credit for the year 2020. So, one can say it is just a preponement of the benefit. Treasury is launching 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.
This benefit is not available to non-resident aliens, individuals who can be claimed as a dependent by another taxpayer and estates and trusts.

ii) Employee Retention Credit:
The employee retention tax credit is a broad-based refundable tax credit designed to encourage employers to keep employees on their payroll. The credit is 50% of Qualified Wages of up to $10,000 for each employee paid by an employer whose business is fully or partially suspended because of COVID-19 or whose gross receipts decline by more than 50%. This credit is available for all types of employers except for the following two:
a)state and local governments and their instrumentalities
b)small businesses who take Small Business Loans
For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid to qualify for the credit.

iii) Retirement Plans Withdrawal:
Taxpayers can withdraw up to $100,000 from their Retirement Account without attracting a withdrawal penalty of 10%. These distributions are taxable as ordinary income, reportable over a period of up to three years. These distributions may also be paid back to the Taxpayer’s Retirement account or to another eligible plan within three years. Existing loans of up to $ 100,000 from qualified plans and repayment can be delayed for one year. The required minimum distribution rules in Sec. 401 are temporarily suspended for 2020. The bill delays 2020 minimum required contributions for single-employer plans until 2021.

iv) Charitable Deductions:
Charitable Contributions are currently allowed as Itemised deductions subject to limitations. CARES Act increased the limitations for Charitable Contribution in the following manner:
a. Individuals: AGI limitation of 60% increased to 100% of AGI
b. Corporations: 10% of Taxable Income increased to 25% of Taxable Income
c. Food Contribution limits increased from 15% to 25%

v) Changes in NOL provisions of TCJA:
TCJA restricted NOL in the following ways:
– NOL Deduction limited to 80% of taxable income
– Only NOL carry forward and no carry-back
– Disallowance of Business losses of noncorporate taxpayers above $ 250,000 ($ 500,000 for MFJ)

The CARES Act repealed all these provisions temporarily. There is no Income limitation of 80% for years beginning before 2021 and NOL carryback allowed up to 5 years. No limitation on the deduction of business loss of more than $250,000 ($500,000 for MFJ). So, now Taxpayers can carry-back their 2018 and 2019 NOLs and revise their returns to claim refunds.

vi) Changes in Business Interest Limitation:
Business Interest limitation of 30% of ATI is increased to 50% of ATI for Tax Year 2019 and 2020.

vii) Refund of Corporation’s Alternate Minimum Tax (AMT):
Corporate AMT generated in 2018 and 2019 is now a refundable credit.

viii) Deferment of Payroll Taxes Payments:
An employer’s share of Payroll Taxes like FICA- Social Security and Medicare taxes which are due between 27th March 2020 to 31st December 2020 can be paid in two installments first on or before 31st December 2021 and balanced on or before 31st December 2022.

ix) Qualified Improvement Property (QIP):
Due to some technical glitch in TCJA, investment in QIP was prevented from Bonus Depreciation. But CARES Act removed this technical glitch and the recovery period of QIP is reduced from 39 years to 15 years making it eligible for Bonus Depreciation.

x) Payroll Tax Credits/Refunds for Paid Leaves:
Business 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 Families First Coronavirus Response Act (FFCRA) are eligible to get Payroll Tax Credit subject to certain limitations and calculations as specified under the FFCRA.  The IRS will provide an immediate dollar for dollar tax offset against payroll taxes like FICA-Social Security/Medicare Taxes that otherwise be owed by the employer. If the credit exceeds the employer’s payroll tax liability, the employer is entitled to a refund.

As an immediate response to the COVID-19 crisis, the Fed announced the above-mentioned relief measures. However, will this help the American Economy to survive and overcome the crisis, only time can tell. There are a lot of questions being raised on the implementation of these measures. One of the most important questions being raised is related to the payment of $1200 to American Households. The IRS is going to use the database of Income Tax Returns for earlier periods, what about the low-income group who would not have filed their returns?

In line with Fed notices about the extension of payment and filings, all States with a personal income tax moved their April 15 filing and payment deadlines to a later date and most States moved it to 15th July. AICPA has given an eleven point recommendation to State CPA societies to recommend to their respective State Tax authorities. Points like a waiver of interest and penalty for delay in payment of taxes, the extension of due dates of estimated tax payments, etc. are covered in it. AICPA has requested all State CPA Societies to convey this to their State Tax Authorities and requests them to implement it.
To summarize this article – there are a lot of relief measures given by the U S.government and American citizens should try to take maximum benefit from these aforementioned reliefs, in a bid to survive through this crisis.