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Back in April we sent out a special newsletter detailing all of the COVID-related tax changes that we had made to Tax Facts Online content up to that point. Not surprisingly, we have continued to see significant changes since then. This week we’re back with a second special newsletter detailing the changes that we have seen since April. Below are all of the changes made that are related to the Families First Coronavirus Response Act, the CARES Act (including the PPP program), and various regulations from the IRS and DOL. As always, log into Tax Facts Online for the full text of these updates and many others.
Families First Coronavirus Response Act: FFCRA Exemption for Very Small Business Clients
Generally, business owners with fewer than 50 employees can claim an exemption from the paid sick leave and expanded FMLA law if they can show that payment would jeopardize their business as a going concern. DOL FAQ have provided new details, which substantially narrow the availability of the exemption. To qualify, the employee must be taking leave to care for children because of COVID-19 and must satisfy one of three possible criteria to demonstrate that paid leave would jeopardize the business. The three conditions are: (1) providing leave would result in the small business expenses and financial obligations exceeding available business revenues, causing the business to stop operating at minimal capacity, (2) absence of the employee requesting leave would result in a substantial risk to the financial health or operational capabilities of the small business because of their specialized skills, knowledge of the business, or responsibilities; or (3) there are not sufficient workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services provided by the employee requesting paid leave, and these labor or services are needed for the small business to operate at a minimal capacity. For more information on the FFCRA paid leave requirements, visit Tax Facts Online. Read More
Families First Coronavirus Response Act: DOL FAQ Clarify Concurrent Use of FFCRA Leave
The FFCRA implemented a new paid sick leave law and expanded FMLA leave options for employees impacted by COVID-19. Many employers have independent policies in place that provide employees with leave options, and the DOL regulations raised questions about when the employer can require the employee to use that leave prior to, or concurrently with, FFCRA leave. Employers cannot require employees to use leave concurrently during the first two weeks of paid sick leave for non-childcare related reasons. Employers can, under some circumstances, require use of employee leave concurrently with expanded FMLA leave for childcare reasons. Employers are only eligible for tax credits with respect to leave paid out under the new law. If the employer requires the employee to use otherwise available employer-paid leave, the tax credit is unavailable with respect to that portion of the employee’s pay. For more information, visit Tax Facts Online. Read More
Families First Coronavirus Response Act: Employee Rights after FFCRA Leave
Employers are generally prohibited from retaliating against employees to take paid sick leave or expanded FMLA leave under the FFCRA. However, the law does not protect employees from layoffs or furloughs undertaken for other reasons, such as the general economic downturn. Exceptions exist for key employees and very small employers with fewer than 25 employees. The exception allows employers to refuse returning the employee to work in the same position if the employee took leave for childcare-related reasons, and all four of the following hardship conditions exist: (1) the position no longer exists due to economic or operating conditions that affect employment and due to COVID-19 related reasons during the period of leave; (2) the employer makes reasonable efforts to restore the employee to the same or an equivalent position; (3) the employer makes reasonable efforts to contact the employee if an equivalent position becomes available; and (4) the employer continues to make reasonable efforts to contact the employee for one year beginning either on the date the leave related to COVID-19 reasons concludes, or the date 12 weeks after the leave began, whichever is earlier. For more information on the FFCRA, visit Tax Facts Online. Read More
Families First Coronavirus Response Act: Moving to Reopen, Employers Begin Evaluating FFCRA Leave Provisions
Now that many more employers are beginning to evaluate whether to reopen as governments relax restrictions, those who have been closed for upwards of two months will have to evaluate whether they must provide paid leave under the FFCRA as COVID-19 continues to spread. The FFCRA paid sick leave and expanded FMLA provisions only applied to employers who continued to operate in the wake of the pandemic–employees who were simply laid off or furloughed were required to seek unemployment benefits. Upon first glance, the new paid leave requirements under the FFCRA seem to provide 12 weeks of paid time off for most small business employees. However, the benefit triggers differ depending on whether the employee is claiming (1) 80 hours paid sick leave or (2) expanded relief under the FMLA. For more information on the benefit triggers, visit Tax Facts Online. Read More
Families First Coronavirus Response Act and CARES Act: Qualifying Healthcare Expenses Eligible for Tax Credits Even for Furloughed Employees
The FFCRA and CARES Act each provide tax credits for employers who continue to pay employee wages through 2020. The amount of wages paid also includes qualifying health expenses that the employer pays on the employee’s behalf. Qualifying health expenses are amounts paid by the employer to maintain a group health plan if the amounts would be excluded from employees’ income under IRC Section 106(a). These expenses should generally be prorated between employees and based on the periods of coverage relating to the payment of wages. Health insurance plans, prescription drug plans, dental and vision plans, health FSAs, HRAs and most employee assistance plans should all qualify. Additionally, the IRS has confirmed that employers can claim the tax credits for qualified healthcare expenses, regardless of whether the employee is paid qualified wages during the same timeframe. As a result, employers who have furloughed employees, but continue to cover healthcare expenses, can claim a tax credit for those expenses. For more information, visit Tax Facts Online. Read More
CARES Act: Telehealth Coverage and HDHP/HSA Eligibility
In response to the evolving COVID-19 pandemic, the CARES Act further expands the pre-deductible services high deductible health plans (HDHPs) may offer. HDHPs are now permitted to cover the cost of telehealth services without cost to participants before the HDHP deductible has been satisfied. HDHPs providing telehealth coverage do not jeopardize their status as HDHPs. Plan members similarly retain the right to fund HSAs after taking advantage of cost-free telehealth services. Under normal rules, HDHPs cannot waive costs for anything other than certain preventative services without jeopardizing HDHP status. Remote health services can be provided under a safe harbor rule through December 31, 2021. For more information on the HDHP qualification rules, visit Tax Facts Online. Read More
CARES Act: Bonus Depreciation Fix, Amended Returns for Partnerships
The CARES Act provided retroactive relief to partnerships on multiple fronts, including by fixing the so-called “retail glitch” to allow businesses to take advantage of 100% bonus depreciation on qualified improvement property through 2022. Existing law may have prevented partnerships from filing amended Forms 1065 and Schedules K-1. Instead, partnerships would have been required to file an administrative adjustment request, so that partners would not have received relief until filing returns for the current tax year. Revenue Procedure 2020-23 allows partnerships to file amended returns and issue revised Schedules K-1 for 2018 and 2019 to take advantage of retroactive CARES Act relief (and, absent further guidance, even if they are not taking advantage of CARES Act relief). The relief applies for 2018 and 2019 as long as the original Forms 1065 and Schedules K-1 were filed/issued before April 13, 2020 (the date Rev. Proc. 2020-23 was released). Partnerships can file amended Form 1065 and Schedule K-1 (electronically or by mail), by checking the Form 1065 “amended return” box and writing “FILED PURSUANT TO REV PROC 2020-23” at the top. The same statement must be included in a statement attached to amended Schedules K-1 sent to partners. The amended returns must be filed/furnished to partners by September 30, 2020. For more information, visit Tax Facts Online. Read More
CARES Act: IRS Guidance on Business Interest Elections
The IRS gives businesses substantial flexibility in making and revoking elections related to business interest expense deductions under the CARES Act. A taxpayer may elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships). A taxpayer permitted to make the election makes the election not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement is required to make the election. The taxpayer can then later revoke that election by filing an amended return or form. Similarly, to use 2019 ATI for 2020, the taxpayer merely files using 2019 ATI (and can then later revoke that election by filing a timely amended return or form). For more information, visit Tax Facts Online. Read More
CARES Act: IRS Allows Corporations to Use Prior Year AMT Credits Retroactively
The 2017 Tax Act generally repealed the corporate AMT, but also permitted corporations to continue claiming a minimum credit for prior year AMT paid. The credit can generally be carried forward to offset corporate tax liability in a later year. The CARES Act eliminates certain limitations that applied to the carryover provision, so that corporations can claim refunds for their unused AMT credits for the first tax year that began in 2018 (i.e., the corporation can take the entire amount of the refundable credit for 2018). The corporation must submit the application for refund before December 31, 2020 and, for convenience, the IRS has institutes a fax procedure for both AMT credit and NOL refund purposes. For more information, visit Tax Facts Online. Read More
CARES Act: Relief for Qualified Plan Loans
The CARES Act relaxed the rules to provide relief for qualified plan participants with existing plan loans. If a participant had an existing plan loan with a repayment obligation falling between March 27 and December 31, 2020, that repayment obligation was extended for one year. Any subsequent repayment obligations are to be adjusted to reflect this extension. For plan participants who are “qualifying individuals,” the plan loan limits were increased to the greater of $100,000 or 100% of the vested balance in the participant’s account. For more information, visit Tax Facts Online. Read More
CARES Act: Expanded Charitable Donation Deduction for 2020
The CARES Act made several changes designed to encourage charitable giving during the COVID-19 outbreak. For the 2020 tax year, the CARES Act amended IRC Section 62(a), allowing taxpayers to reduce adjusted gross income (AGI) by $300 worth of charitable contributions made in 2020 even if they do not itemize. Under normal circumstances, taxpayers are only permitted to deduct cash contributions to charity to the extent those donations do not exceed 60% of AGI (10% for corporations). The CARES Act lifts the 60% AGI limit for 2020. Cash contributions to public charities and certain private foundations in 2020 are not subject to the AGI limit. Individual taxpayers can offset their income for 2020 up to the full amount of their AGI, and additional charitable contributions can be carried over to offset income in a later year (the amounts are not refundable). The corporate AGI limit was raised to 25% (excess contributions also carry over to subsequent tax years). For more information, visit Tax Facts Online. Read More
CARES Act: IRS Releases Initial Q&A on Qualified Plan Loan & Distribution Provisions
The IRS released the first Q&A in what is likely to be a series of guidance on the CARES Act retirement-related provisions. One overarching issue is the IRS confirmation that plan sponsors can rely upon past guidance issued in response to Hurricane Katrina in 2005 and the RMD waiver in 2009 for help implementing the CARES Act provisions. Under initial guidance, individuals are only eligible for COVID-19 related distributions or loans if they themselves are impacted (qualification cannot currently be based on a spouse or dependent’s job loss). The Q&A also clarifies that increased loan limits are currently available between March 27, 2020 and September 22, 2020. Further, the guidance confirms that the loan and distribution relief is optional for plan sponsors–and sponsors can elect to adopt one provision and not another (including the loan repayment option). For more information on the CARES Act loan provisions, visit Tax Facts Online. Read More
CARES Act: Calculating Qualified Plan Loans and the One-Year Look-back Rule
The CARES Act allows plan sponsors to double the qualified plan loan limit for qualified individuals. Plan loans made between March 27, 2020 and September 23, 2020 are limited to the lesser of (1) $100,000 or (2) 100% of the participant’s vested account balance. Despite this, even if the individual is qualified, plan sponsors must remain aware of the one-year look-back rule. IN reality, the $100,000 limit is reduced by the excess of the employee’s highest outstanding plan loan balance during the one-year period ending on the day before the loan is made, over the employee’s outstanding balance of any plan loan on the date the loan is made (this calculation also includes loans from any other plans maintained by the employer or member of a controlled group). For more information on the qualified plan loan rules, visit Tax Facts Online. Read More
CARES Act: IRS Waives Physical Presence Requirement for Spousal Consent to Participant Benefit Elections
IRC Section 417 generally requires spousal consent to a waiver of a qualified joint and survivor annuity (QJSA), which includes the waiver of a QJSA as part of a participant’s request for a plan distribution or a plan loan (the availability of which were expanded under the CARES Act). The spousal consent must generally be witnessed by a plan representative or notary public in person (the physical presence requirement). Notice 2020-42 provides relief in permitting remote electronic notarization executed via live auto-video technology that satisfies any state-level requirements that apply to a notary public. The relief in Notice 2020-42 applies to any participant election that requires a signature to be witnessed in the physical presence of a plan representative or notary in 2020. For more information on spousal consent requirements, visit Tax Facts Online. Read More
CARES Act: IRS Expands RMD Waiver Relief for 2020
The CARES Act waived all RMD requirements for 2020. Despite this, the law was enacted after some taxpayers had already taken their 2020 RMDs early in the year. For those who took RMDs very early in the year, the 60-day rollover period had already expired. In response, the IRS announced that anyone who took a 2020 RMD is eligible to roll the funds back into their account penalty-free. The 60-day rollover period was extended through August 31, 2020, so clients still have only a limited amount of time in which to act. Further, the rollover does not count toward the otherwise applicable “one rollover per 12-month period” rule or the restriction on rollovers for inherited IRAs. For more information on the RMD rules, visit Tax Facts Online. Read More
Payroll Protection Program: Defining “Payroll Costs” for PPP
Taxpayers with fewer than 500 employees are eligible for new “payroll protection loans” administered via the Small Business Administration. In general, the loans may be forgiven (and amounts excluded from income for tax purposes) if used to cover payroll costs, which are defined in the CARES Act to include the sum of (A) payments of any compensation with respect to employees that is (1) salary, wage, commission, or similar compensation, (2) payment of cash tip or equivalent, (3) payment for vacation, parental, family, medical, or sick leave, (4) allowance for dismissal or separation, (5) payment required for the provisions of group health care benefits, including insurance premiums, (6) payment of any retirement benefit or (7) payment of State or local tax assessed on the compensation of employees; and (B) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation that is not more than $100,000 in one year, as prorated for the covered period. Payroll costs exclude (1) compensation of an individual employee over $100,000 per year, as prorated for the covered period, (2) taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period, (3) any compensation of an employee whose principal place of residence is outside of the United States, (4) qualified sick leave wages for which a credit is allowed under the FFCRA or (5) qualified family leave wages for which a credit is allowed under the FFCRA. For more information, visit Tax Facts Online. Read More
Payroll Protection Program: The Finer Points of PPP Loan Forgiveness
Loan forgiveness offers powerful assistance to those small businesses who were actually able to receive Paycheck Protection Program loan funds. However, loan forgiveness is not without its costs. While amounts forgiven will not be included in income under the usual cancellation of indebtedness rules, business owners may not be entitled to their typical business deductions either. Notice 2020-32 clarifies that otherwise allowable deductions are disallowed if the payment of the expense (1) results in loan forgiveness under the PPP loan program and (2) the income associated with the loan forgiveness is excluded from income under CARES Act Section 1106(i). Although legislation proposed in Congress may change this result, small business clients should pay close attention to the potential future tax impact of loan forgiveness. For more information on implications of loan forgiveness, visit Tax Facts Online. Read More
Payroll Protection Program: Guidance on PPP Eligibility
The Treasury has updated its guidance related to the CARES Act Paycheck Protection Program (PPP) loan forgiveness requirements. The Treasury now notes that most companies with adequate sources of alternative liquidity are likely not eligible for the program. In order to qualify for the loans, PPP borrowers are now required to provide a good faith certification stating that current economic conditions and uncertainty make the loan necessary to support ongoing operations. While Treasury calls out public companies with substantial market value and access to the capital markets specifically, the guidance could also impact businesses who have adequate alternative liquidity to support operations. PPP borrowers who find they cannot make the certification in good faith are permitted to return the funds. For more information on the PPP loan rules, visit Tax Facts Online. Read More
Payroll Protection Program: Increased Flexibility for PPP Recipients
PPP loan forgiveness is determined based on how the small business client spent the loan proceeds. Under the PPPFA, at least 60% of the loan must be used for payroll costs (this 60% threshold was reduced from 75% under the CARES Act). Under the terms of the CARES Act, amounts used to cover eligible expenses could be forgiven if used during the eight-week period following the loan origination date. The PPPFA extended the eight-week period to 24 weeks from the date the lender made the first loan payment to the small business owner. Unless Congress acts again, the funds must all be spent by December 31, 2020 in order to be eligible for forgiveness. The amount forgiven can also be reduced if the employer made certain staffing cuts or cut employee compensation levels. The PPPFA gives employers until December 31, 2020 to bring workers back to work/restore wage levels and continue to qualify for loan forgiveness (extended from prior law, which set the deadline at June 30)). Read More
IRS, DOL Announce Extension of COBRA Election Period
Under normal circumstances, an individual has 60 days from the date when a COBRA qualifying event occurs to elect COBRA coverage (or make a new COBRA election). In light of the COVID-19 outbreak, the IRS and DOL have announced an extension of this 60-day window. The 60-day election window is essentially paused for relevant time periods that include March 1, 2020. The clock is stopped and will not resume until the end of the “outbreak period”. The outbreak period is defined as the window of time beginning March 1, 2020 and ending 60 days after the date that the COVID-19 national emergency is declared ended. The 45-day payment clock and 30-day grace period for late COBRA payments are also paused. For more information on the COBRA election rules, visit Tax Facts Online. Read More
DOL Releases New COBRA Notice in Light of Growing Employment Litigation
The DOL released a revised COBRA general notice and election notice on May 1, 2020, in response to increasing furloughs and layoffs in the wake of COVID-19–and a growing risk of employment litigation. Employers are not required to post the new notices, but may wish to in light of the evolving situation. These new notices add information about how Medicare eligibility impacts COBRA eligibility (highlighting the fact that COBRA coverage is usually secondary to Medicare). Employers who use the model notices are deemed to comply with COBRA notice requirements. For more information on COBRA coverage election requirements and COVID-19, visit Tax Facts Online. Read More
IRS Provides Relief for Cafeteria Plan Participants in Response to COVID-19
Under normal circumstances, cafeteria plans are not permitted to allow participants to make mid-year election changes except in limited situations. Notice 2020-29 permits employees to allow certain mid-year elections made during calendar year 2020 that would otherwise be impermissible, including changes to salary reduction contribution elections. The guidance also allows participants to revoke (or make) an election with respect to health and dependent care FSAs on a prospective basis during 2020 to respond to changing needs during the COVID-19 pandemic. Further, the guidance clarifies that the relief for high deductible health plans (HDHPs) and expenses related to COVID-19 (regarding an exemption for telehealth services) may be applied retroactively to January 1, 2020. For more information on the mid-year election rules for cafeteria plans, visit Tax Facts Online. Read More
IRS Makes Temporary & Permanent Changes to the FSA Grace Period Rules
IRS Notice 2020-33 and Notice 2020-29, released concurrently, provides relief with respect to unused funds in a flexible spending account. Under Notice 2020-29, if an employee has unused amounts remaining in a health FSA or a dependent care assistance program at the end of a grace period (or plan year) ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. Notice 2020-33 makes a change to the carryover rules that apply to health FSAs, so that the amount that can be carried over to the following year will equal 20 percent of the maximum inflation-indexed salary reduction amount under Section 125 (increasing the carryover amount from $500 to $550 for 2020). For more information on the rules governing health FSAs, visit Tax Facts Online. Read More
Treasury Allows Tax Credit for Employers Paying Health Expenses of Furloughed Workers
Clearing up confusion (and revising initial guidance), the Treasury has announced that if an employer continues to pay an employee’s health insurance costs during a furlough period, the employer is entitled to claim a tax credit with respect to those expenses. This is the case even if the employer is not currently paying the employee’s wages. The employee retention credit is generally equal to up to 50% of the employee wages and certain other qualifying expenses. For more information on the employee retention tax credit, visit Tax Facts Online. Read More
Required Business Expense Reimbursement in the Age of COVID-19
Some employers are now permitting employees to work from home–while others are requiring it. In some jurisdictions (California and Illinois, for example) employers are required to reimburse employees for employment expenses. This may create the need for employers to reimburse employees for the cost of maintaining a home office. Further, the FLSA does not permit an employer to require an employee to pay for business expenses if doing so would reduce the employee’s earnings to below the minimum wage. However, simply providing cash reimbursement may generate additional taxable income for the employee. The miscellaneous itemized deduction for expenses incurred in the “trade or business of being an employee” was suspended for 2018-2025. Employers may instead wish to consider a program where the employer leases or purchases the required equipment for the employee’s use. For more information on the impact of reimbursing business expenses, visit Tax Facts Online. Read More
Dependent Care FSAs Provide Flexibility in the Face of a Pandemic
With so many employees working from home–and scrambling to find childcare options as businesses begin to reopen–many employees rethinking contributions to dependent care FSAs. The rules governing changes to dependent care FSA contributions are more flexible than health FSAs. Employees are permitted to make mid-year changes in pre-tax contributions if their circumstances relating to the need for dependent care changes. Employees can reduce their contributions if they are working from home and do not need childcare, or can increase the contributions when they return to work and need to provide for increased childcare costs. Further, employees who have been furloughed and laid off might want to ask whether their plan contains a spend-down feature. These features are optional, but allow former employees to seek reimbursement for dependent care expenses incurred through the end of the tax year (even if their employment has been terminated). Employers have the option of adding a spend-down feature at any time. For more information on dependent care FSAs, visit Tax Facts Online. Read More
IRS Provides Relief for Employee Donations of Unused Sick, Vacation & PTO
The IRS has provided relief so that employees can forgo sick, vacation or personal leave because of the COVID-19 pandemic without adverse tax consequences. Under the guidance, an employer can make cash payments to charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave which their employees forgo. Those amounts will not be treated as compensation and the employees will not be treated as receiving the value of the leave as income. Therefore, taxable income will not be increased, but the employee cannot claim a deduction for the leave donated to their employer. Employers, however, may deduct these cash payments as a business expense or as a charitable contribution deduction if the employer otherwise meets the respective requirements of either section. For more information on the charitable contributions, visit Tax Facts Online. Read More
Home Office Deductions in the Age of Covid-19
With so many taxpayers working from home—some indefinitely—do to Covid-19, many are likely wondering whether they can deduct their home office expenses. In short, traditional W-2 employees cannot deduct their home office expenses regardless of whether they would otherwise qualify for the deduction. The 2017 tax reform legislation eliminated this deduction for 2018-2025. Self-employed taxpayers can deduct expenses associated with maintaining a home office if the office is used regularly and exclusively as the taxpayer’s principal place of business (if the office is within the dwelling unit). A home office deduction is permitted for self-employed taxpayers with separate structures if the office/workspace is used “in connection with” the trade or business. For more information on the home office deduction, visit Tax Facts Online. Read More
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