IRS Section 139 - Qualified Disaster Relief Payments

As the impact of the Coronavirus pandemic continues to grow some businesses may be inclined to provide additional assistance to their employees on top of the current relief bills, especially in cases where businesses have shifted to a remote workforce.  There may be a way to provide such assistance while doing so in a tax efficient way. When the President declared a national emergency, the door to Internal Revenue Code Section 139 was opened.  

Section 139 allows "qualified disaster relief payments" to be excluded from employees' taxable wages which includes amounts paid for "reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster."  Employers are also allowed to deduct payments under Section 139 as a normal business expense.

Usually, Section 139 is applied in the context of a natural disaster in which property needs to be repaired or replaced, or people need to find temporary housing while they are unable to use their residences. All of those types of expenses are clearly covered by Section 139. The Coronavirus pandemic is causing different types of economic damages, including increased medical and child care expenses as a result of schools being closed, expenses for setting up home office, increased expenses related to obtaining normal living items etc. To the extent that an employee incurs additional reasonable and necessary personal, family, or living expenses as a result of the disaster, they would qualify under Section 139. It's also important to remember that Section 139 doesn't apply to any expenses that are reimbursed, such as by insurance or to normal living expenses (such as mortgage payments, utilities, or food). Types of expenses that may qualify as additional reasonable and necessary personal, family or living expenses as a result of the Coronavirus may be:

  • Over-the-counter medications, hand sanitizer and home disinfectant supplies.
  • Child care or tutoring due to school closings.
  • Work-from-home expenses such as setting up a home office, increased utilities expenses and higher Internet costs.
  • Increased commuting costs, such as taking a taxi instead of using public mass transit.
  • Unreimbursed health-related expenses.

Section 139 does not impose any limit on the amount or frequency of qualified disaster payments nor are employees required to provide receipts or other proof supporting their expenses, provided that the amount of the payments can be reasonably expected to commensurate with the expenses incurred.

It is recommended that the employer have a written qualified disaster relief payment plan along with other documentation, which would include:

  • The amounts paid and to whom;
  • The start and end date of the program;
  • A general listing of the expenses that will be paid or reimbursed on behalf of the employees, and;
  • The maximum amount the employer will pay per-employee or in the aggregate.

Payments for lost wages are not covered under Section 139.

Please consult your tax advisor or attorney for more information if you are interested in learning more about disaster relief payments to employees.

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IRS Extends More Tax Deadlines to Cover Individuals, Trusts, Estates, Corporations, Non-profits and Others

To help taxpayers, the Department of Treasury and the Internal Revenue Service announced today that Notice 2020-23 extends additional key tax deadlines for individuals and businesses.

Last month, the IRS announced that taxpayers generally have until July 15, 2020, to file and pay federal income taxes originally due on April 15. No late-filing penalty, late-payment penalty or interest will be due.

Today's notice expands this relief to additional returns, tax payments and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations, non-profits and other non-corporate tax filers qualify for the extra time. This means that anyone, including Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.

Specified forms: Federal tax forms and payments covered by the relief include:

  • Individual income tax payments and return filings on Form 1040, U.S. Individual Income Tax Return, and other forms in the 1040 series;
  • Calendar year or fiscal year corporate income tax payments and return filings on Form 1120, U.S. Corporation Income Tax Return, and other forms in the 1120 series;
  • Calendar year or fiscal year partnership return filings on Form 1065, U.S. Return of Partnership Income, and Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;
  • Estate and trust income tax payments and return filings on Form 1041, U.S. Income Tax Return for Estates and Trusts, and other forms in the 1041 series;
  • Estate and generation-skipping transfer tax payments and return filings on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and other forms in the 706 series;
  • Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, and any supplemental Form 8971;
  • Gift and generation-skipping transfer tax payments and return filings on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, that are due on the date an estate is required to file Form 706 or Form 706-NA;
  • Estate tax payments of principal or interest due as a result of an election made under Secs. 6166, 6161, or 6163 and annual recertification requirements under Sec. 6166;
  • Exempt organization business income tax and other payments and return filings on Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e)); and
  • Excise tax payments on investment income and return filings on Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, and excise tax payments and return filings on Form 4720, Return of Certain Excise Taxes under Chapters 41 and 42 of the Internal Revenue Code.

Extension of Time to File Beyond July 15

Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to Oct. 15, 2020, by filing Form 4868 through their tax professional, tax software or using the Free File link on Businesses who need additional time must file Form 7004. An extension to file is not an extension to pay any taxes owed. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by the July 15, 2020, deadline to avoid additional interest and penalties.

Estimated Tax Payments

Besides the April 15 estimated tax payment previously extended, today's notice also extends relief to estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.  

2016 Unclaimed Refunds – deadline extended to July 15

For 2016 tax returns, the normal April 15 deadline to claim a refund has also been extended to July 15, 2020. The law provides a three-year window of opportunity to claim a refund.  If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. The law requires taxpayers to properly address, mail and ensure the tax return is postmarked by the July 15, 2020, date.

State and Local Responses

Please note these deadlines are for Federal filings and payments only. There may still be some state filing or payment requirements. Please contact us for additional information.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act, the third item of federal legislation enacted in response to the unprecedented COVID-19 pandemic, was passed by Congress on March 27th and swiftly signed into law the same day.

The scope of the relief bill is far-reaching, providing financial assistance through channels ranging from additional funding for medical institutions to emergency grants for small businesses to targeted relief via federal tax law changes. These tax law changes, many of which were given retroactive effect, will help taxpayers and businesses cope with cash flow issues over the coming weeks and months by reducing the tax burden and/or providing a larger refund than would be allowed under pre-CARES Act law.

In this article, we are focusing on the individual provisions within the law.

Charitable Contribution Deductions

Taxpayers that do not itemize can now take a new $300 above-the-line tax deduction for charitable contributions. The contribution must be made in cash to a qualified organization to qualify. Taxpayers that do itemize will benefit from increased limits on charitable contributions. The previous limitation of 60% of modified adjusted gross income doesn't apply to cash contributions made, generally, to public charities in 2020. No connection between the contributions and COVID-19 activities is required. Contributions to a supporting organization or a donor-advised fund do not qualify for either of these deductions.

Permissible Withdrawals from Retirement Plan Funds

The CARES Act allows participants of qualified retirement plans (including individual retirement accounts (IRAs)) to withdraw up to $100,000 from qualified retirement accounts for COVID-19 related purposes without incurring the 10% penalty on early distributions.  Any individual who receives such a COVID-19-related distribution may repay the distribution to the eligible retirement plan or IRA within three years of taking the distribution, in one or more contributions.

If the participant or IRA owner does not intend to repay the withdrawal, they may elect to include the withdrawal in income ratably over a three-year period beginning with the year in which the distribution was taken.  

COVID-19 related reasons include distributions from January 1, 2020, through December 31, 2020, to an individual (a) diagnosed with COVID-19, (b) whose spouse or dependent is diagnosed with the virus, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours, being unable to work due to lack of child care, closing or reducing hours of a business, or other factors as determined by the Treasury Department.

Retirement Plan Loans Expanded  

Prior to the CARES Act, retirement plan loans were capped at the lesser of (i) $50,000; or (ii) the greater of fifty percent (50%) of the participant's vested accrued benefit or $10,000.  But effective March 27, 2020, through December 31, 2020, participants may elect to take a plan loan in an amount up to the lesser of (i) $100,000; or (ii) the greater of one hundred percent (100%) of the participant's vested accrued benefit or $10,000.  The Act also delays the loan repayment date by one year for any loans with due dates between March 27, 2020, and December 31, 2020.

In order to take advantage of these expanded loan amounts and loan payment deferrals, the individual must be a qualified individual who was: (a) diagnosed with COVID-19, (b) whose spouse or dependent is diagnosed with the virus, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours, being unable to work due to lack of child care, closing or reducing hours of a business, or other factors as determined by the Treasury Department.

If an employer maintains a qualified retirement plan with a loan option, the plan must be amended to adopt these loan expansion provisions by December 31, 2022, to maintain its qualified status.

Required Minimum Distributions Suspended

The CARES Act temporarily suspends all required minimum distributions due from qualified retirement plans and individual retirement accounts in calendar year 2020.  Specifically, any required minimum distributions due from January 1, 2020, through December 31, 2020, are waived.  This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70 1/2 in 2019.

IRAs and HSAs

Individual taxpayers are allowed to make contributions to an IRA for 2019 until July 15, 2020. 

You may also make contributions to your health savings account ("HSA") or Archer Medical Savings Account ("MSA") for 2019 at any time up to July 15, 2020. 

Student Loans

Borrowers with federal student loans are permitted to defer payments penalty free until September 30, 2020. Borrowers who are not in default will automatically have their interest rate set to 0% for at least 60 days.

HSA and MSA Accounts

For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription (i.e. - "over the counter" medications). And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Excess Business Losses 

The limitation imposed by the Tax Cuts and Jobs Act of 2017 (TCJA) on the deduction of excess business losses will not apply for tax years 2018-2020. The excess business loss is the excess of the taxpayer's aggregate trade or business deductions for the year over the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (single) or $500,000 (jointly). This change suggests filing an amended return if this limitation was applied on a tax return for 2018 or 2019.

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Employee Retention Credit

The Treasury Department and the Internal Revenue Service have launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19, for a maximum credit of $5,000 per employee.

Does my business qualify to receive the Employee Retention Credit?

The credit is available to all employers regardless of size, including tax-exempt organizations. There are only a few exceptions: State and local governments and their instrumentalities, self-employed individuals and small businesses receiving Small Business Interruption Loans under the Paycheck Protection Program (PPP).

Qualifying employers must fall into one of two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

These measures are calculated each calendar quarter.

How is the credit calculated?

The amount of the credit is 50% of qualifying wages (including health plan expenses) paid up to $10,000 in total, so that the maximum credit for qualified wages paid to any employee is $5,000. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit.

How do I know which wages qualify?

Qualifying wages are based on the average number of a business's employees in 2019.

Employers with less than 100 employees: For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed.  If the employees worked full time and were paid for full time work, the employer still receives the credit.

Employers with more than 100 employees: For employers who had more than 100 employees on average in 2019, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

Are any wages not eligible?

Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus, nor for wages taken into account for the employer credit for paid family and medical leave. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.

I am an eligible employer. How do I receive my credit?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

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CARES ACT Changes Retirement Plan and Charitable Contribution Rules

As we all try to keep ourselves, our loved ones, and our communities safe from the coronavirus (COVID-19) pandemic, you may be wondering about some of the recent tax changes that were part of a tax law passed on March 27.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a variety of relief, notably the “economic impact payments” that will be made to people under a certain income threshold. But the law also makes some changes to retirement plan rules and provides a new tax break for some people who contribute to charity.

Waiver of 10% early distribution penalty

IRAs and employer sponsored retirement plans are established to be long-term retirement planning accounts. As such, the IRS imposes a penalty tax of an additional 10% if funds are distributed before reaching age 59½. (However, there are some exceptions to this rule.)

Under the CARES Act, the additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with COVID-19 or is economically harmed by it. Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread-out.

Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules

Depending on when you were born, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts — including traditional IRAs, SEP accounts and 401(k)s — when you reach age 70½ or 72. These distributions also are subject to federal and state income taxes. (However, you don’t need to take RMDs from Roth IRAs.)

Under the CARES Act, RMDs that otherwise would have to be made in 2020 from defined contribution plans and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70½ in 2019.

New charitable deduction tax breaks

The CARES Act makes significant liberalizations to the rules governing charitable deductions including:

  • Individuals can claim a $300 “above-the-line” deduction for cash contributions made, generally, to public charities in 2020. This rule means that taxpayers claiming the standard deduction and not itemizing deductions can claim a limited charitable deduction.
  • The limit on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020. Instead, an individual’s eligible contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 is required.

Far beyond

The CARES Act goes far beyond what is described here. The new law contains many different types of tax and financial relief meant to help individuals and businesses cope with the fallout.

© 2020

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