William L. Stark and Company
Certified Public Accountants and Business Consultants
President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.
President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.
Generally, the following individual and business tax-related provisions are included in what lawmakers have dubbed the "phase three" COVID-19 emergency relief package:
Wolters Kluwer Special Report CARES Act Tax Briefing
Wolters Kluwer provides a detailed discussion of the tax-related provisions under the CARES Act in the "Special Report CARES Act (COVID-19 Economic Stimulus) Tax Briefing" (at https://engagetax.wolterskluwer.com/Cares-Act.pdf).
Let’s Work Together
Treasury Secretary Steven Mnuchin, who spent many late nights in the U.S. Capitol recently participating in bipartisan negotiations on the Senate’s CARES Act, thanked Republican and Democratic leadership in both the Senate and the House for their bipartisanship. "I am pleased that Congress has passed the CARES Act, the largest economic relief package in history for hardworking Americans and businesses that, through no fault of their own, have been adversely impacted by the coronavirus outbreak," Mnuchin said in a March 27 press release. "President Trump is fully committed to ensuring that American workers and businesses have the resources they need. This legislation provides much-needed relief to help our fellow Americans overcome this difficult but temporary challenge."
Phase Four Economic Relief Package
The CARES Act is considered "phase three" of lawmakers’ and the Trump administration’s collaborative response to the COVID-19 pandemic. Meanwhile, lawmakers on both sides of the aisle, including House Ways and Means Committee Chair Richard Neal, D-Mass., have said they want to see a fourth economic relief measure.
"Our work to help Americans during this emergency won’t stop here. Congress must do more to address the significant public health and economic consequences of the coronavirus," Neal said in a March 27 statement. "In a fourth response package, I want to provide any needed additional support to people who have lost their incomes and to affected patients and health care providers. We should take bold action to improve our country’s economic health too," he added. Additionally, Neal said that he would like to see the Earned Income Tax Credit (EITC) and the Child Tax Credit expanded, as well as infrastructure investments to put people back to work and reinvigorate the economy.
Legislative View – Looking Back and Ahead
"From a legislative view, the CARES Act shares the key characteristics that we’ve seen with other emergency legislation, namely bipartisan willingness to forego typical concerns over cost and take action at unusual speed," John Gimigliano, principal-in-charge of federal legislative and regulatory services in the Washington National Tax practice of KPMG LLP, told Wolters Kluwer in a March 27 emailed statement. "Similar dynamics were apparent in other emergency legislation including bills enacted after the attacks of September 11, Hurricane Katrina, and during the financial crisis," Gimigliano added. "But those precedents also show that each of those three characteristics begins to break down with successive legislative attempts. That made quick passage of the CARES Act key and the development of a ‘coronavirus 4’ package something to watch closely."
Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.
Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.
"CARES 2"
President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-127) on March 27. The CARES Act is known on Capitol Hill as the third phase of legislation aimed to address the national emergency. However, House Speaker Nancy Pelosi, D-Calif., has said that a House floor vote on a "CARES 2" package could happen later in April.
"The acceleration of the coronavirus crisis demands that we continue to legislate," Pelosi said in a "Dear Colleagues" letter sent out to members during the week of April 6. "We must double down on the down-payment we made in the CARES Act by passing a CARES 2 package, which will extend and expand this bipartisan legislation to meet the needs of the American people," she added. According to Pelosi, the CARES 2 package would (1) go further in assisting small businesses (including farmers), (2) extend and strengthen unemployment benefits, and (3) distribute additional direct payments.
"Our communities cannot afford to wait, and we must move quickly," Pelosi wrote. "It is my hope that we will craft this legislation and bring it to the Floor later this month."
Paycheck Protection Program
Meanwhile, the Trump administration is seeking an increase in funding for the CARES Act’s Paycheck Protection Program. Accordingly, several bipartisan lawmakers have called for congressional action to provide the necessary funding needed for small businesses. The administration is reportedly asking for an additional $250 billion for the largely overrun loan program.
"Through this tax break, workers can get back on payrolls and stay there. By working with their bank, small businesses can get eight weeks of cash-flow assistance through 100 percent federally guaranteed loans," House Ways and Means ranking member Kevin Brady, R-Tex., said on April 7. "If the business [including churches] uses the money to maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven."
Likewise, Senate Majority Leader Mitch McConnell, R-Ky., called for swift action on the matter. "Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program," McConnell said on April 7. "I will work with [Treasury] Secretary Steven Mnuchin and [Senate Minority Leader Chuck] Schumer and hope to approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday."
The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.
The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.
Eligibility Based on Returns, Generally
Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals, $2,400 for married couples, and up to $500 for each qualifying child. The payment amount will be reduced based on adjusted gross income (AGI). The phase-out begins at AGI above $75,000 for single individuals, $150,000 for joint filers, with the payment amount reduced by $5 for each $100 above the thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.
The IRS will generally base the payment amount on information from:
1099s Used for Certain Recipients
The IRS will use the information on the Form SSA-1099 or Form RRB-1099 to generate economic impact payments to recipients of benefits reflected in the Form SSA-1099 or Form RRB-1099 who are not required to file a tax return and did not file a return for 2018 or 2019. This includes senior citizens, Social Security recipients and railroad retirees who are not otherwise required to file a tax return.
These recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.
No payments for dependents, currently. Since the IRS would not have information regarding any dependents for these recipients, each person would receive $1,200 per person, without the additional amount for any dependents at this time.
Other Details
The IRS has addressed other common queries related to economic impact payments:
More Information
Even though it currently has a reduced staff in many of its offices, the IRS assures taxpayers that it remains committed to helping eligible individuals receive their payments expeditiously. The IRS urges taxpayers to visit its Coronavirus Tax Relief webpage ( https://www.irs.gov/coronavirus for updated information related to economic impact payments, rather than calling IRS assistors who are helping process 2019 returns.
For the latest information on the economic impact payments, see the IRS’s "Economic impact payments: What you need to know" webpage ( https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know).
The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.
The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.
NOTE: The relief is limited to the relief explicitly provided in Notice 2020-18, Notice 2020-20, and Notice 2020-23, and does not apply for any other type of federal tax, any other type of federal tax return, or any other time-sensitive act.
Relief Measures
Specified Forms and Payments
The filing and payment obligations covered by the relief are the following:
synopsisThe Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.
The Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.
Get My Payment
The "Get My Payment" tool generally allows consumers to check the status of their payments, and to enter their direct deposit information if the IRS does not already have it.
"Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation," the IRS said in an April 15 statement emailed to Wolters Kluwer. "The IRS employees are delivering these payments in record time compared to previous stimulus efforts."
Treasury had earlier announced that millions of Americans were already starting to see their economic impact payments. "These payments are being automatically issued to eligible 2019 or 2018 federal tax return filers who received a refund using direct deposit," Treasury said in an April 13 press release.
Non-Filers Option
Americans who did not file a tax return in 2018 or 2019 can use the "Non-Filers: Enter Payment Info Here" option ( https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here) to submit basic personal information to receive their payments.
For those who filed 2018 or 2019 tax returns with direct deposit information or receive Social Security, however, no additional action on their part is needed. These individuals are expected to automatically receive the payment in their bank accounts.
"We are pleased that more than 80 million Americans have already received their Economic Impact Payments by direct deposit in record time," Treasury Secretary Steven Mnuchin said in an April 15 press release. "The free ‘Get My Payment App’ will allow Americans who do not have their direct deposit information on file with the IRS to input it, track the status, and get their money fast."
Status Not Available
Many individuals began voicing complaints on April 15 that the Get My Payment tool was not functional. In response, the IRS on the same day stated: "The Get My Payment site is operating smoothly and effectively. As of mid-day today, more than 6.2 million taxpayers have successfully received their payment status and almost 1.1 million taxpayers have successfully provided banking information, ensuring a direct deposit will be quickly sent. IRS is actively monitoring site volume; if site volume gets too high, users are sent to an online ‘waiting room’ for a brief wait until space becomes available, much like private sector online sites. Media reports saying the tool ‘crashed’ are inaccurate."
The IRS also provided consumers with the following information regarding certain situations in which payment status is deemed unavailable. The IRS listed the following reasons why users may receive the "Status Not Available" notice while using the online tool:
"You can check the app again to see whether there has been an update to your information," the IRS said. "The IRS reminds taxpayers that Get My Payment data is updated once per day, so there’s no need to check back more frequently."
As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.
As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.
The guidance also allows taxpayers to make or revoke various elections whether or not directly related to QIP, such as the election out of bonus depreciation. These elections and revocations may be made on an amended return or Form 3115.
The guidance applies to a tax year ending in 2018, 2019, or 2020.
Comment: QIP placed in service in 2018 by a 2017/2018 fiscal-year taxpayer is covered by the guidance, since it applies to tax years ending in 2018.
Amended Return Due Date
When an amended return (including an amended Form 1065, U.S. Return of Partnership Income) is filed for the placed-in-service year to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021, but not later than the applicable assessment limitations period. Certain partnerships subject to the centralized audit regime may file an administrative adjustment request (AAR) by October 15, 2021.
Late Elections and Revocations
For a limited time, taxpayers may make a late election or revoke a prior election that was made for depreciable property placed in service during a tax year ending in 2018, 2019, or 2020. The return must have been timely filed and filed before April 17, 2020. These elections and revocations are not limited to QIP. The covered elections are:
Generally, making or revoking an election is not considered an accounting method change. However, because of the administrative burden of filing amended returns and AARs, the IRS allows taxpayers to treat the making or revoking of these election as a change in method of accounting with a Code Sec. 481(a) adjustment.
Taxpayers may make or revoke these elections by filing an amended return (including any subsequent affected return) or AAR for the placed-in-service year of the property by October 15, 2021. However, if earlier, the amended return must be filed no later than the expiration of the limitations period for the tax year of the amended return.
For taxpayer choosing not to file an amended return, a Form 3115 to make or revoke these elections must be filed with a timely filed original income tax return (or Form 1065) for the first or second tax year after the tax year in which the property was placed in service, or with a timely filed original income return (or Form 1065) filed on or after April 17, 2020, and on or before October 15, 2021.
Excluded Taxpayers
These procedures do not apply to QIP that was expensed under any provision, including Code Sec. 179 as qualified real property. They also do not apply to an electing real property trade or business or electing farming business that made a late election or withdrew an election related to the business interest deduction limitations ( Code Sec. 163(j)) for the tax year in which QIP was placed in service. (Changes to depreciation affected by the late election or withdrawn election were previously addressed in Rev. Proc. 2020-22.)
Accounting Method Change Lists
Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, which contains all automatic consent accounting method changes, is modified to add new section 6.19 to reflect the rules described in this guidance. Section 6.19 provides that certain "eligibility" rules do not apply. Thus, the automatic procedure will apply even if the change is made in the taxpayer’s last tax year of business or the taxpayer made a change for the same item during any of the five tax years ending with the year of change.
Rev. Proc. 2015-56, 2015-49, I.R.B. 827, relating to the remodel-refresh safe harbor, is also modified to require a taxpayer to substantiate the portion of the property that is qualified improvement property.
The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).
The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).
The CARES Act provides a five-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020. The Tax Cuts and Jobs Act ( P.L. 115-97) had eliminated carryback periods effective for tax years ending after 2017. Some taxpayers have filed 2018 and 2019 returns without using five-year carryback period.
The relief:
Six Month Extension for Filing Refund Claims
Taxpayers are granted an extension of time to file refund applications on Form 1045 (individuals, estates, and trusts) or Form 1139 (corporations) with respect to the carryback of an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.
2017/2018 Fiscal-Year Taxpayers
Relief is also provided for 2017/2018 fiscal year taxpayer who failed to claim an NOL carryback due to a drafting error in the Tax Cuts and Jobs Act that provided the termination of two-year NOL carryback period applied to NOLs arising in tax years ending after 2017. The CARES Act corrects the effective date error by providing that the termination applies to tax years beginning after 2017. This makes these taxpayers eligible to claim an NOL carryback. The CARES Act allows these taxpayer to file a late application for a tentative refund. An application for a tentative refund is considered timely if filed by July 25, 2020.
The guidance also explains how 2017/2018 fiscal year taxpayer may waive the carryback period, reduce the carryback period (if it is longer than the standard two-year carryback), or revoke an election to waive a carryback period for a tax year that began before January 1, 2018, and ended after December 31, 2017.
Partnerships with NOLs
See the story "BBA Partnerships Can Amend Returns for CARES Benefits" on Rev. Proc. 2020-23, below.
The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).
The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).
Forms 1139, 1045
"Starting on April 17, 2020, and until further notice, the IRS will accept eligible refund claims Form 1139 submitted via fax to 844-249-6236 and eligible refund claims Form 1045 submitted via fax to 844-249-6237," the IRS noted in the Coronavirus Tax Relief FAQ posted on its website on April 13. "Before then, these fax numbers will not be operational. We encourage taxpayers to wait until this procedure is available rather than mail their Forms 1139 and 1045 since mail processing is being impacted by the emergency."
In a tailored effort to implement sections 2303 and 2305 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), the IRS has opened digital transmission of Form 1139 and Form 1045 until further notice. Most notably, only refund claims made under the CARES Act sections 2303 and 2305 are eligible for the temporary procedures.
Generally, under the CARES Act:
IRS Accepting Yet Not Processing Mail
Similarly, Sunita Lough, deputy commissioner for services and enforcement at the IRS urged taxpayers and practitioners during an April 13 Tax Policy Center (TPC) webinar not to submit Forms 1139 and 1045 related to the CARES Act by mail. Ordinarily, these forms may be filed only via hard copy delivered through the U.S. Postal Service (USPS) or by a private delivery service.
However, the IRS is currently receiving so much mail that the USPS can no longer hold it, according to Lough, adding that the IRS is "literally holding [mail] in trailers until employees can get back to work." Thus, in an effort to "send a signal" that the IRS will implement the CARES Act without access to its mail, it is both allowing and encouraging the fax option, Lough said.
"Only fax Forms 1139 and 1045 specific to the CARES Act," Lough said, adding that any other forms submitted via fax, even Forms 1139 and 1045 unrelated to the CARES Act, will not be processed. Further, the IRS specifically states on its website that any Form 1120X, Amended U.S. Corporation Income Tax Return, that is faxed to the fax numbers noted above will not be accepted for processing.
Pro Tip
"If you are trying to decide between filing Form 1139 and 1120X, it is usually best to file Form 1139 to get a refund," Kirsten Wielobob, principal, Tax Policy and Controversy, Ernst & Young LLP, said on April 10. "It is colloquially referred to as a ‘quickie refund,’" Wielobob said. Generally, the Form 1139 is not subject to joint committee review as the Form 1120X is, which can be filed electronically but can add a layer of complexity. Additionally, Wielobob cautioned that the delays at the IRS could mean filing Form 1139 by paper through the mail is no longer the "quick" option, which appears in line with both the IRS’s cautioning against submitting the form by mail and its newly announced fax option.
The IRS has released guidance on making the following elections for the business interest deduction limitation:
The IRS has released guidance on making the following elections for the business interest deduction limitation:
The guidance also provides transition relief to taxpayers making or revoking the election to be an electing real property trade or business or an electing farming trade or business under Code Sec. 163(j)(7).
Business Interest Limit
A taxpayer’s deduction of business interest expenses paid or incurred for any tax year is generally limited to the sum of business interest income, floor plan financing interest, and 30 percent of ATI. The Code Sec. 163(j) limitation is generally increased from 30 percent to 50 percent of a taxpayer’s ATI for any tax year beginning in 2019 and 2020 under the CARES Act.
A taxpayer may elect not to have the increased limitation apply in 2019 or 2020. In addition, a taxpayer may elect for any tax year beginning in 2020 to use its ATI from the 2019 tax year to calculate its Code Sec. 163(j) limitation. The 50 percent ATI limitation does not apply to partnerships for the 2019 tax year. Instead, a partner treats 50 percent of its allocable share of a partnership’s EBIE for 2019 as an interest deduction in the partner’s 2020 tax year without limitation. The remaining 50 percent of such EBIE remains subject to the Code Sec. 163(j) limit applicable to EBIE carried forward at the partner level. A partner may elect out of the 50 percent EBIE rule.
Election Out of 50 Percent ATI
There is no formal election or statement required to the make the election not to apply the 50 percent ATI limit for the 2019 or 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065 in the case of a partnership for 2020) by the due date for the return, including extensions, using the 30 percent ATI limitation. The election may also be made on an amended return or administrative adjustment request (AAR).
The election must be made for each tax year. For a partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable controlled foreign corporation (CFC) by each controlling domestic shareholder. The taxpayer is granted consent from the IRS to revoke the election by merely filing an amended return and using the 50 percent limit.
Election to Use 2019 ATI in 2020
There is also no formal election or statement required to the make the election to use 2019 ATI to use in the 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, using the taxpayer’s 2019 ATI. The 2019 ATI used for the calculation is pro rated if the taxpayer’s 2020 tax year is a short tax year. The election may also be made on an amended return or AAR.
For partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable CFC by each controlling domestic shareholder. For a CFC group, the election is not effective for any group member unless made for every tax year of a CFC group member for which the election is available.
Election Out of 50 Percent EBIE Rule
There is also no formal election or statement required by a partner in a partnership to make the election out of the 50 percent EBIE rule. A partner makes the election by filing its federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, by not applying the 50 percent EBIE rule in determining the Code Sec. 163(j) limitation. The election may also be made on an amended return or AAR. The partner is granted consent from the IRS to revoke the election by merely filing an amended return, Form 1065, or AAR applying the 50 percent EBIE rule.
Real Property and Farming
The Code Sec. 163(j) limit applies to all taxpayers with business interest except small businesses with meet an average annual gross receipts test. It also does not apply to certain excepted businesses including an electing real property business and an electing farming business.
Under proposed regulations, a taxpayer must make an election for a real property trade or business, or farming business, with respect to each eligible trade business. The election is made by attaching a statement to the taxpayer’s timely filed original tax return (including extensions). A real property trade or business or farming business that elects out of the business interest deduction limit must depreciate certain property using alternative depreciation system (ADS).
In light of the legislative changes, a taxpayer may make the election or revoke an election to be an electing real property trade or business or an electing farming trade or business for the 2018, 2019, or 2020 tax year by filing an amended federal income tax return, amended Form 1065, or amended AAR. The return must include an election statement or withdrawal statement, and any collateral adjustments to taxable income. This include its depreciation of property affected by making a late election or withdrawing the election. The amended federal income tax return, Form 1065, or AAR generally must be filed by October 15, 2021.
The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.
The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.
Amendment Option
BBA partnerships that filed Form 1065, U.S. Return of Partnership Income, and gave all partners Schedules K-1, Partner’s Share of Income, Deductions, Credits, for the tax years beginning in 2018 or 2019 before the IRS issued Rev. Proc. 2020-23 can file amended returns and furnish amended K-1s before September 30, 2020. The amended returns can take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.
Filing Requirements
To amend a return, a BBA partnership must file a Form 1065, checking the "Amended Return" box and furnish amended Schedules K-1 to partners. The BBA partnership must write "FILED PURSUANT TO REV PROC 2020-23" at the top of the amended return, and attach a statement with each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail.
There are additional rules for BBA partnerships that are currently under examination for a tax year beginning in 2018 or 2019, or that have previously filed an AAR.
GILTI Regulations
A partnership may continue to apply the rules of Proposed Reg. §1.951A-5 when filing an amended Form 1065 and furnishing amended Schedules K-1 consistent with those proposed regulations. The partnership must notify partners as required by Notice 2019-46, I.R.B. 2019-37, 695.
The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.
The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.
Expanded Leaves
The Act’s Division C (Emergency Family and Medical Leave Expansion Act) and Division E (Emergency Paid Sick Leave Act) requires employers with fewer than 500 employees to provide expanded paid family leave and paid sick leave to certain employees. These employees are unable to work or telework due to certain circumstances related to the coronavirus (COVID-19).
Tax Credits for Paid Leave
The Act’s Division G provides payroll tax credits to employers that make the required leave payments to their employees. The Act also provides comparable credits for self-employed individuals carrying on any trade or business under Code Sec. 1402, if the self-employed individual would be entitled to receive paid leave if he or she were an employee of an employer (other than himself or herself).
The refundable tax credits for most employers with fewer than 500 employees apply to qualified sick leave and family leave wages paid for the period from April 1, 2020, to December 31, 2020. Additionally, the self-employment tax credit will be determined based on days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.
The Treasury Secretary selected the April 1 date in coordination with the U.S. Department of Labor’s determination of the effective date for employers’ compliance with the Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act requirements.
The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.
The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.
The relief applies to deposits of employment taxes reduced in anticipation of the credits for:
COVID-19 Refundable Credits
The Families First Act generally requires employers of fewer than 500 employees to provide paid sick leave and expanded family and medical leave, up to specified limits, to employees unable to work or telework due to certain circumstances related to coronavirus disease 2019 (COVID-19). Generally, the Families First Act provides a refundable tax credit against an employer’s share of the Social Security portion of Federal Insurance Contributions Act (FICA) tax and an employer’s share of the Social Security and Medicare portions of the Railroad Retirement Tax Act (RRTA) tax ( "creditable employment taxes") for each calendar quarter. The credit is equal to 100 percent of qualified leave wages paid by the employer, plus qualified health plan expenses with respect to that calendar quarter.
The CARES Act allows certain employers experiencing a full or partial business suspension due to orders from a governmental authority, or a statutorily specified decline in business, due to COVID-19 to claim a refundable tax credit against an employer’s creditable employment taxes. The credit amount is up to 50 percent of the qualified wages (including allocable qualified health expenses), and is limited to $10,000 per employee over all calendar quarters combined.
Employers report these refundable credits on their returns for reporting their liability for FICA tax (or RRTA tax), which for most employers subject to FICA tax is the quarterly Form 941. An employer may claim an advance payment of the refundable tax credits by filing new Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Penalty Relief for Qualified Leave Wages
An employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified leave wages in a calendar quarter if:
Thus, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the amount of qualified leave wages and qualified health plan expenses paid by the employer in the calendar quarter prior to the required deposit, plus the amount of the employer’s share of Medicare tax on such qualified leave wages, as long as the employer does not also seek an advance credit for the same amount.
The total amount of any reduction in any required deposit may not exceed the total amount of qualified leave wages and qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages in the calendar quarter, minus any amount of qualified leave wages, qualified health plan expenses, and employer’s share of Medicare tax that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.
Penalty Relief for Qualified Retention Wages
An eligible employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified retention wages in a calendar quarter if:
Thus, after a reduction, if any, of a deposit of employment taxes by the amount of credits anticipated for qualified leave wages, an employer may further reduce, without a penalty, the amount of the deposit of employment taxes by the amount of qualified retention wages paid by the employer in the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit for the same amount.
The total amount of any reduction in any required deposit may not exceed the total amount of qualified retention wages in the calendar quarter, minus any amount of qualified retention wages that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.
An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.
An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.
"Check-the-Box" Election
An LLC with more than one member can elect tax status as:
An LLC with only one member can elect tax status as:
The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):
Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.
If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.
The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.
The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.
The surtax applies to individuals, estates, and trusts. The surtax applies if the taxpayer has NII and his or her "modified" adjusted gross income exceeds certain statutory thresholds: $250,000 for married taxpayers and surviving spouses; $125,000 for married filing separately; and $200,000 for individuals and other taxpayers. The tax is broad and can raise tax bills by hundreds, if not thousands, of dollars.
Complex provisions
The regulations are extensive and complex. They address a number of issues that were not answered in the statute, such as the interaction of Code Sec. 1411 (the surtax provisions) and Code Sec. 469 (passive activity loss rules). Significant areas addressed in the proposed regulations include:
Some issues, however, are not yet addressed, such as the application of the Code Sec. 469 material participation rules to trusts and estates. Further guidance from the IRS is expected.
Borrowed definitions and principles
Net investment income that is subject to the new 3.8 percent tax generally includes interest and dividend income as well as capital gains from investments. But Code Sec. 1411 doesn't stop there, seeking to tax "passive activities" and contrasting those activities with a "trade or business" in often complex ways.
Because Code Sec. 1411 does not define many important terms, the regulations use definitions from several other Tax Code provisions. For example, the definition of a trade or business is determined under Code Sec. 162, regarding trade or business expenses. This definition is essential to Code Sec. 1411, since the application of each of the three categories of net investment income depends on determining whether the income is from a trade or business. The regulations also borrow the definition of a disposition, which applies to category (iii) income, from other provisions, such as Code Section 731 (partnership distributions) and Code Sec. 1001 (dispositions of property).
New elections available
The regulations provide certain elections that may be beneficial to many taxpayers. Taxpayers that engage in multiple activities under Code Sec. are allowed to make another election to regroup their activities. Taxpayers married to a nonresident alien can elect to treat their spouse as a U.S. resident, which allow more income to escape the 3.8 percent surtax.
Net investment income generally includes interest and dividend income as well as capital gains from investments. To prevent avoidance of the tax, the regulations include substitute payments of interest and dividends in the definition. The IRS also warned in the preamble to the proposed regulations that it will scrutinize activities designed to circumvent the surtax and will challenge questionable transactions using applicable statutes and judicial doctrines. The IRS further warned that taxpayers should figure their exposure to the 3.8 percent tax quickly since liability for this additional tax must be included in quarterly estimated tax computations and payments starting with first quarter 2013.
Please feel free to contact this office for a personalized review of how the 3.8 percent tax may impact you, and what compliance and planning steps should be considered as a consequence.
Effective January 1, 2013, a new Medicare tax takes effect. The Additional Medicare Tax imposes a 0.9 percent tax on compensation and self-employment income above a threshold amount. Unlike regular Medicare tax, the Additional Medicare Tax has no employer match but employers have withholding obligations. The IRS issued proposed reliance regulations about the Additional Medicare Tax in December 2012.
Effective January 1, 2013, a new Medicare tax takes effect. The Additional Medicare Tax imposes a 0.9 percent tax on compensation and self-employment income above a threshold amount. Unlike regular Medicare tax, the Additional Medicare Tax has no employer match but employers have withholding obligations. The IRS issued proposed reliance regulations about the Additional Medicare Tax in December 2012.
Medicare
Medicare is funded through payroll taxes. Employees and employers (and self-employed individuals) all pay into Medicare. Employees and employers each pay Medicare tax at a rate of 1.45 percent (self-employed individuals pay at a combined rate but are allowed to deduct half of the Medicare tax as an adjustment to income). The Additional Medicare Tax is a new tax that may apply to certain taxpayers in addition to regular Medicare tax. The new tax was part of the Patient Protection and Affordable Care Act (Affordable Care Act), which was passed by Congress in 2010. However, Congress delayed the start date of the new tax until 2013.
Liability
Generally, an individual is liable for Additional Medicare Tax if the individual's wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status. Only individuals with incomes above the threshold amount will be liable for the new tax and if their employer does not withhold it, they will have to pay it when then they file their returns.
The threshold amounts are: $250,000 for married couples filing jointly; $200,000 for single individuals, head of household (with qualifying person) and qualifying widow(er) with dependent child; and $125,000 for married couples filing separately.
Withholding
An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or wages paid by another employer. The IRS explained in its proposed reliance regulations that the employer has this withholding obligation even though an employee may not be liable for Additional Medicare Tax because, for example, the employee's wages together with that of his or her spouse do not exceed the $250,000 threshold for married couples filing jointly.
Let's look at an example from the IRS proposed reliance regulations:
Elena, who is married and files a joint return, receives $100,000 in wages from her employer for the calendar year. Caleb, Elena's spouse, receives $300,000 in wages from his employer for the same calendar year. Elena's wages are not in excess of $200,000, so her employer does not withhold Additional Medicare Tax. Caleb's employer is required to collect Additional Medicare Tax only with respect to wages it pays which are in excess of the $200,000 threshold (that is, $100,000) for the calendar year.
Planning considerations
Taxpayers who believe they may be liable for the Additional Medicare Tax in 2013 and beyond should carefully plan ahead. The IRS has cautioned that an individual may owe more than the amount withheld by the employer, depending on the individual's filing status, wages, compensation, and self-employment income. All these factors come into play in planning for the Additional Medicare Tax.
One strategy may be to make estimated tax payments and/or request additional income tax withholding. Our office can help you determine which strategy would work best for you.
Employers
There is no employer match for the Additional Medicare Tax. However, the Affordable Care Act and the IRS proposed reliance regulations require employers to withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year, beginning January 1, 2013. If an employer fails to withhold, the IRS may impose penalties on the employer and the employee would be liable for the tax.
Reliance regulations
The regulations issued by the IRS in December 2012 are proposed reliance regulations. The IRS explained that it intends to finalize the proposed regulations in 2013. Taxpayers may rely on the proposed regulations for tax period beginning before the date that the regulations are finalized.
If you have any questions about the Additional Medicare Tax, please contact our office.
Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.
Beginning with 2012 Forms W-2, large employers must report the aggregate cost of employer-sponsored health insurance provided to employees. 2012 Form W-2s must be furnished to employees by January 31, 2013.
For tax years beginning on or after January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) required that employers report the aggregate cost of employer-sponsored health insurance provided on Form W-2, Wage and Tax Statement. The IRS then exempted all employers from the requirement for 2011, making 2011 reporting optional.
Reporting took effect in early 2012, but only for large employers filing 250 or more Forms W-2 for the preceding calendar year (2011). Small employers are exempt from reporting for 2012 and beyond, until the IRS issues further guidance. An employer does not have to report the cost if it is not required to issue a Form W-2. This would be the case for a retiree or other former employee who does not receive compensation.
The aggregate reportable cost should be shown on Form W-2, Box 12, using Code DD. The IRS has reiterated that reporting is for informational purposes only, and that the cost of health insurance generally remains excludable from income.
Reporting applies to applicable coverage under any group health plan provided by an employer or employee organization, if the coverage is excludable from the employee's income or would have been excludable if provided by the employer. Costs for self-insured plans and plans of self-employed persons are covered, unless the only coverage provided by the employer is a self-insured plan that is not subject to COBRA continuation coverage requirements (e.g. a self-insured church plan). Coverage does not include long-term care; accident or disability coverage; coverage for treatment of the mouth; and coverage only for a specified illness or disease.
Reportable costs include both employer costs and employee costs for the health insurance, even if the employee paid his or her share through pre-tax or salary reduction contributions. The aggregate cost includes the cost of coverage included in the employee's income, such as the cost of coverage for a person who is not a dependent or a child under age 27.
However, costs do not include amounts contributed to an Archer Medical Savings Account, health savings account, or health reimbursement arrangement, and salary reduction contributions made to a flexible spending arrangement.
Reporting is required of most employers, including federal, state, and local governments, and churches and other religious organizations.
Please contact this office if you would like further information on how these new reporting obligations may apply to your business.