The COVID-19 public health crisis has taken its toll on businesses, individuals, retirees, and everyone in between. One of the efforts to help bring economic relief is a series of tax breaks to help individuals and businesses. We’ve summarized the most significant COVID-19 tax relief changes that will have a broad impact. Those of you with specialized tax situations should consult with your tax advisor to determine whether there are additional benefits for you.
COVID-19 Tax Relief for Individual Taxpayers
Tax Deadline Postponements
When COVID-19 began to quickly spread throughout the United States in March, the IRS extended most federal tax payments and return filing dates from April 15, 2020, to July 15, 2020. This relief was automatic for taxpayers, and if those payments and filings are completed by the new deadline, taxpayers will not be subject to any interest, penalties, or additional taxes.
Other deadlines that have also been postponed include first and second quarter estimated tax payments, filing for any unclaimed 2016 refunds, and federal income tax return filing for Americans living abroad. Note that deadline changes only apply to federal income taxes. Each state has its own deadlines, and not all of them have opted to delay.
A note about these deadline delays: the IRS regularly warns taxpayers about scams related to identity theft. The longer you wait to file, the more time scammers have to file a fraudulent return on your behalf. You can e-file your return to lock your tax record and block additional filing attempts, but still take advantage of the delayed payment deadline by scheduling your payment for July 15.
You may have already reaped the benefits of one tax provision, which was included in the CARES Act. Eligible Americans were sent stimulus checks, an immediate response by the government to help individuals and families who may have experienced a financial loss as a result of the epidemic. These payments are advance refunds of a new 2020 tax credit, also known as a recovery rebate. Because it’s a tax credit, you won’t count the amount you receive toward your total income on your 2020 tax return. If you didn’t receive a payment because you exceeded the income threshold on your last tax return, but you expect to earn below the threshold in 2020, you’ll be able to claim the credit when you file your 2020 tax return next spring.
The rules about high-deductible health plans (HDHPs) have been amended in order to allow them to fully cover COVID-related testing and treatment for individuals who haven’t met their deductibles. HDHPs that cover these costs will maintain their pre-crisis tax treatment. If you’re covered under an HDHP and contribute to a health savings account (HSA), you can continue to contribute and expect those dollars to be treated as pre-tax—even if your plan covers COVID-19 testing and treatment costs prior to you meeting your deductible.
Loans from Retirement Plans
If coronavirus shutdowns have impacted your income, you may be considering a loan to help cover your bills. As part of the CARES Act, taxpayers can take up to $100,000 from their retirement plans without being subject to the penalties associated with early distributions. Those distributions must be for reasons related to the crisis and can be repaid within three years. Eligible distributions can be taken up until the end of 2020.
The Act also temporarily suspends the required minimum distribution rules for retirement plans for 2020 and delays 2020’s minimum required contributions for single-employer plans until 2021.
Not-for-profit organizations need more support than ever before. In response, temporary tax benefits outlined in the CARES Act provide incentives for donors. Taxpayers can now take a deduction for up to $300 in charitable contributions without itemizing on their 2020 tax return. Adjusted Gross Income (AGI) limitations have also been modified for donors who are able to give more generously. In the past, taxpayers could only deduct 60% of their AGI via charitable contributions, but in 2020 you can deduct the full amount of your AGI. For example, if your taxable income is $100,000 in 2020 and you donate $100,000 to eligible organizations, you won’t have to pay taxes on your income. Any donations greater than $300 will require you to itemize.
COVID-19 Tax Relief for Small Business Owners
Payroll Tax Credits for Sick Leave
The Families First Coronavirus Response Act created tax credits for employers who provide paid sick leave or family medical leave for their employees. These credits only apply if those workers took leave due to coronavirus (i.e. they’re ill, caring for a sick family member, or their childcare has been shut down).
For eligible employees who receive paid family leave, employers can receive a payroll tax credit that equals 100% of the qualified family leave wages under the Emergency Family and Medical Leave Expansion Act. Paid family leave is for employees who cannot work or telework due to a lack of childcare. The credit is available for wages paid between April 1, 2020, and December 31, 2020, for up to $200 per day, or a maximum of $10,000 in wages per employee.
Employers will also receive a tax credit for 100% of the wages for paid sick leave. Under the Emergency Paid Sick Leave Act, employers with fewer than 500 employees must provide up to 80 hours of paid sick time if the individual is unable to work due to being quarantined. The credit will cover paid wages of up to $511 per day and up to 10 days per calendar quarter.
Self-employed individuals may also qualify for these tax credits. Individuals are considered eligible if they work in their businesses regularly and would be entitled to receive paid leave if they were W-2 employees.
The CARES Act provides additional relief to small businesses by extending the deadlines for payroll tax payments. 50% of 2020 employer payroll taxes won’t be due until December 31, 2020; the remaining 50% will be due December 31, 2021. The same dates apply for self-employment taxes.
Employee Retention Credit
Businesses that are forced to close due to the coronavirus pandemic may be eligible for an employee retention credit against employment taxes of up to $5,000 for each employee. Employers must be able to show gross receipts that are less than half of receipts during the same quarter the previous year. These businesses will continue to be eligible for the credit when they reopen—until gross receipts exceed 80% of gross receipts from the same quarter of last year.
Employers with fewer than 100 employees are eligible for the credit against all wages, excepting paid sick and family leave as those are covered by the credits detailed above. If you received a Paycheck Protection Program loan, you’re not eligible for the employee retention credit. Governmental employers and the self-employed are also not eligible.
Qualified Improvement Property
If your business made improvements to real property in 2018 or 2019, you may be able to amend your return or file a change in accounting method in order to take advantage of bonus depreciation. The CARES Act fixed the retail glitch introduced in the Tax Cuts and Jobs Act, and the timing is fortuitous for businesses that have made recent improvements to commercial property.
Do you need help interpreting COVID-19 tax relief? Contact us to schedule a consultation.