In addition to specific employer/employee provisions, the COVID related relief legislation also has income tax changes.
The IRS extended the April 15 tax filing and tax payment deadline by 90 days until July 15 for all taxpayers, without limitation on how much is owed. The 2020 estimated tax payments due April 15 are also deferred until July 15. The filing and payment extensions are automatic, i.e., no extensions need to be filed to qualify for the extensions. A taxpayer may make HSA contributions until the July 15th date. The IRS has also announced that it will generally suspend collection related activities until July 15th. California has conformed to federal law and also extended the filing and tax payment deadline until July 15th. The period from April 15, 2020 to July 15, 2020 will be disregarded in the calculation of interest, penalty, or addition to tax for failure to file returns or pay taxes.
Eligible individuals are entitled to a rebate of $1,200 if single or $2,400 if married filing jointly plus $500 for each child under the age of 17 (phased out for incomes over $75,000, single, and $150,000, married filing jointly). The credit phases out entirely at $99,000, for single filers ($198,000 for joint filers). The rebates are treated as an advance refund of a 2020 tax credit. An eligible individual is any individual who has a Social Security number and who is not a nonresident alien, an individual who can be claimed as a dependent on another taxpayer’s return, or an estate or trust. Some checks may not arrive until September because the IRS will send approximately 100 million checks at a rate of 5 million checks per week, which could take 20 weeks.
An individual is allowed to make a cash contribution of up to $300 to certain qualifying charities and deduct the contribution no matter if they take the standard or itemized deduction. In addition, the CARES Act changes the limit on charitable giving from 60% of a taxpayer’s adjusted gross income to 100% of a taxpayer’s adjusted gross income. However, the increased limit for charitable contributions is applicable only for cash contributions. Any excess contributions would be carried over for five years. For corporations, the charitable deduction limit would increase from 10% of adjusted taxable income to 25%.
The current interest expense deduction that is limited to the extent of 30% of adjusted taxable income is increased to 50% for 2019 and 2020. If 2020 becomes a loss year, the business can elect to use its 2019 adjusted taxable income in computing its 2020 limitation (not applicable to partnerships, but partners will be allowed a greater 2020 deduction of excess business interest expense).
The current tax law that disallows net operating loss (NOL) carrybacks and limits the use of NOL carryforwards is suspended for 2018, 2019 and 2020, and taxpayers will be permitted to carry back NOLs for up to five years. The CARES Act does not alter the indefinite carryforward of NOLs arising in those years.
For 2018, 2019, and 2020, business losses can offset non-business income without limitation.
In 2020, an employer can pay up to $5,250 of an employee’s student loan debt on a tax-free basis.
Under Internal Revenue Code Section 139, employers can provide assistance directly to an employee free of income tax, provided, however, they are used to pay or reimburse amounts that are reasonably expected to be incurred for incremental personal, family, living, or funeral expenses incurred as a result of the Covid-19 crisis. There is no requirement under Section 139 for the employer to make a specific assessment of the financial need of the employee. This qualified disaster relief payment must be made to, or for the benefit of, an individual, but only to the extent any expense compensated by the payment is not otherwise compensated for by insurance or some other reimbursement.
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