Important Coronavirus Related Tax Changes

By: Nelson Toner, Bryce Morrison and Andrew Wells

On March 13, 2020, President Trump issued an emergency declaration in response to the COVID-19 global pandemic. The declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency. . .”

Additionally, on March 18, 2020 the President signed the Families First Coronavirus Response Act into law, which mandates that businesses with less than 500 employees are required to provide employees with paid leave in relation to the impact of COVID-19. The businesses will be able to recoup the cost of the paid leave through payroll tax credits.

Below you will find outlined in further detail what these important new federal tax changes mean for you and your business.

Tax Filing Deadlines Extended

With the issuance of IRS Notice 2020-18, the tax filing and payment deadline has been extended to July 15th, 2020 for federal income tax returns that would normally be April 15th, 2020. No interest or penalties will be assessed on tax amounts due for these returns until after July 15th. This tax filing extension applies to any individuals, estates, trusts, partnerships, associations, companies or corporations whose tax filing deadline would have been April 15th. Moreover, the three month extension also applies to any tax estimate payments for the 2020 tax year that would otherwise be due on April 15, 2020. However, it is unclear whether there will be any additional extensions for 2nd quarter tax estimate payments, which are still currently due June 15, 2020.

In addition, prior guidance stated that the payment extension would be limited to $10 million dollars for C-Corporations and $1 million for other taxpayers. However, according to the new guidance, there are no limits regarding tax amounts owed. Furthermore, there is no need to file an extension to take advantage of the new extended filing date.

In short, those who usually are required to file their federal income taxes for the 2019 tax year on April 15th will not be required to file their tax returns and pay their taxes owed until July 15, 2020. It is unclear at this time whether ME, New Hampshire, and all of the affected states will follow the federal government’s lead and extend tax filing and payment requirements. However, some states such as California and Maryland have already extended their deadlines. We are closely monitoring to see how states begin to respond as the situation continues to develop.

The Families First Coronavirus Response Act and Payroll Taxes

With the issuance of IR 2020-57 the Treasury Department, IRS, and the Department of Labor issued a release that offers some guidance in regard to how employers can take advantage of the payroll credits that will be used to pay for their new obligation to provide employees with COVID-19 related paid leave under the Families First Coronavirus Response Act, which will go into effect April 2, 2020. The payroll credits are designed to reimburse the employer dollar for dollar for the employees’ paid leave and are “refundable” credits.

The following are some key takeaways from IR 2020-57 concerning the payroll tax credits:

• The credits will be used to pay for the new sick leave and extended leave requirements for businesses under the Families First Coronavirus Response Act.
• Employers receive a 100% reimbursement through the credits, and health insurance costs are included in the credit.
• Self-employed individuals also receive an equivalent credit.
• The reimbursement is intended to be quick and easy to obtain. The employers can immediately take the payroll credits when they file their payroll tax return, and if the employer is owed a refund, the IRS will send the refund as quickly as possible.
• If the employer’s paid leave expenses are higher than their payroll taxes owed, they can apply for an “accelerated credit” from the IRS.
• The IRS has stated that they will release more guidance shortly.

Examples

IR 2020-57 provides some basic examples of how the payroll credits will work:

Example 1: An eligible employer pays $5,000 of sick leave and is otherwise required to pay $8,000 in payroll taxes. The employer can use $5,000 of the payroll taxes owed to pay for the employees’ sick leave and would only be required to pay $3,000 in payroll taxes.

Example 2: An eligible employer pays $10,000 of sick leave and is otherwise required to pay $8,000 in payroll taxes.  The employer can use $8,000 of the payroll taxes owed to pay for the employees’ sick leave and can file for a request of an “accelerated credit” to pay for the remaining $2,000 of sick leave.

We expect that there will be more guidance coming as the situation evolves in the coming days and weeks.