The United States Department of Labor (DOL) has issued a detailed memo, in question and answer format, about the paid sick leave and the expanded family and medical leave contained in the recently enacted Families First Coronavirus Response Act (FFRCA), i.e., the second coronavirus (COVID-19) relief legislation. While the memo is mostly about the leave provisions themselves, it does contain some information about the employer tax credits that are based on the leave provisions.
Background. On March 18, the President signed the FFRCA (PL 116-127) intended to ease the economic consequences stemming from the coronavirus disease outbreak by providing family and medical leave and sick leave to employees and providing tax credits to employers and self-employeds who provide the leave. The FFRCA also affects employer-sponsored health plans.
DOL memo provides tax credit information. Here are some of the tax-credit-related information in the DOL memo.
Documentation requirements. An employer that intends to claim a tax credit under the FFCRA for its payment of the sick leave or expanded family and medical leave wages should retain appropriate documentation in its records. It should consult IRS applicable forms, instructions, and information for the procedures that must be followed to claim a tax credit, including any needed substantiation to be retained to support the credit.
With respect to employees that take expanded family and medical leave to care for their child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19, an employer may require the employees to provide it with any additional documentation in support of such leave, to the extent permitted under the certification rules for conventional Family Medical Leave Act (FMLA) leave requests. For example, this could include a notice that has been posted on a government, school, or day care website, or published in a newspaper, or an email from an employee or official of the school, place of care, or child care provider.
Payments to employees that exceed paid leave provisions of FFRCA. An employer may pay its employees in excess of FFCRA requirements. But it cannot claim, and will not receive tax credit for, those amounts in excess of the FFCRA's statutory limits.
In an Information Release, the Treasury Department and IRS have announced that distribution of economic impact payments, made as part of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136, 3/27/2020, the Act), will begin in the next three weeks and will be distributed automatically, with no action required for most people. However, people who did not file 2018 or 2019 federal income tax returns will need to submit "a simple tax return" to receive the stimulus payment.
The Information Release answers the following questions:
Who is eligible for the economic impact payment? Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.
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 or $2,400 for married couples. Parents also receive $500 for each qualifying child.
How will the IRS know where to send a payment? The vast majority of people do not need to take any action to provide IRS with a way to send them their payment. The IRS will calculate and automatically send the economic impact payment to those eligible.
How will the IRS calculate the amount of payment? For people who have already filed their 2019 tax returns, the IRS will use information from those returns to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.
What should a recipient do if IRS doesn't have his direct deposit information? In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.
If a potential recipient is not required to file a 2018 or 2019 tax return, can that person still receive a payment? Yes. People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Persons who are otherwise not required to file a tax return will not owe tax.
How can a person in the groups listed in the above question file the tax return needed to receive an economic impact payment? IRS.gov/coronavirus will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information.
If a person required to file a 2018 or 2019 retun has not yet filed either return, can the person still receive an economic impact payment? Yes. The IRS urges anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment. Taxpayers should include direct deposit banking information on the return.
How long are the economic impact payments available? For those concerned about visiting a tax professional or local community organization in person to get help with a tax return, these economic impact payments will be available throughout the rest of 2020.
Where can one get more information? The IRS will post all key information on IRS.gov/coronavirus as soon as it becomes available.
The IRS has a reduced staff in many of its offices but says that it is committed to helping eligible individuals receive their payments expeditiously. It asks that taxpayers, etc. check for updated information on IRS.gov/coronavirus rather than call IRS assistors who are helping process 2019 returns.
Individual recovery rebate/credit
New law. Credit allowed for 2020. Under the CARES Act, an eligible individual is allowed an income tax credit for 2020 equal to the sum of: (1) $1,200 ($2,400 for eligible individuals filing a joint return)plus (2) $500 for each qualifying child of the taxpayer (as defined under Code Sec. 24(c) for purposes of the child tax credit). (Code Sec. 6428(a), as added by Act Sec. 2201(a)) The credit is refundable. (Code Sec. 6428(b), as added by Act Sec. 2201(a))
Observation. For purposes of the child tax credit, the term "qualifying child" means a qualifying child of the taxpayer, as defined for purposes of the dependency exemption by Code Sec. 152(c), who hasn't attained age 17.
Observation. Individuals who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs such as SSI benefits, are eligible for the credit and the advance rebate. (CARES Section-by-Section Summary, p. 10).
Eligibility for credit. For purposes of the credit, an "eligible individual" is any individual other than a nonresident alien or an individual for whom a Code Sec. 151 dependency deduction is allowable to another taxpayer for the tax year. Estates and trusts aren't eligible for the credit. (Code Sec. 6428(d), as added by Act Sec. 2201(a))
Observation. Children who are (or can be) claimed as dependents by their parents aren't eligible individuals, even if they have enough income to have to file a return. It makes no difference if the parent chooses not to claim the child as a dependent, because the dependency deduction is still "allowable" to the parent.
Observation. An individual who wasn't an eligible individual for 2019 may become one for 2020, e.g., where the individual was a dependent for 2019 but not for 2020. IRS won't send an advance rebate to such an individual, because advance rebates are generally based on information on the 2019 return (see below). However, the individual will be able to claim the credit when filing the 2020 return.
Phaseout of credit. The amount of the credit is reduced (but not below zero) by 5% of the taxpayer's adjusted gross income (AGI) in excess of: (1) $150,000 for a joint return, (2) $112,500 for a head of household, and (3) $75,000 for all other taxpayers. (Code Sec. 6428(c), as added by Act Sec. 2201(a))
Observation. Under these rules, the credit is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the credit is completely phased out when AGI exceeds $146,500. (CARES Section-by-Section Summary, p. 10)
Advance rebate of credit during 2020. Each individual who was an eligible individual for 2019 is treated as having made an income tax payment for 2019 equal to the advance refund amount for 2019. The "advance refund amount" is the amount that would have been allowed as a credit for 2019 had the credit provision been in effect for 2019.
IRS will refund or credit any resulting overpayment as rapidly as possible. No interest will be paid on the overpayment.
If an individual hasn't yet filed a 2019 income tax return, IRS will determine the amount of the rebate using information from the taxpayer's 2018 return. If no 2018 return has been filed, IRS will use information from the individual's 2019 Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.
Observation. In other words, even though the credit is technically for 2020, the law treats it as an overpayment for 2019 that IRS will rebate as soon as possible during 2020.
Observation. Most eligible individuals won't have to take any action to receive an advance rebate from IRS. This includes many low-income individuals who file a tax return to claim the refundable earned income credit and child tax credit. (CARES Section-by-Section Summary, p. 10)
IRS may make the rebate electronically to any account to which the payee authorized, on or after Jan. 1, 2018, the delivery of a refund of federal taxes or of a federal payment.
No later than 15 days after distributing a rebate payment, IRS must mail a notice to the taxpayer's last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.
No advance rebate will be made or allowed after Dec. 31, 2020. (Code Sec. 6428(f), as added by Act Sec. 2201(a))
Advance rebate reduces credit allowed for 2020. The amount of credit that is allowable for 2020 must be reduced (but not below zero) by the aggregate advance rebates made or allowed to the taxpayer during 2020.
Observation. If the taxpayer received an advance rebate during 2020 that was less than the credit to which the taxpayer is entitled for 2020, the taxpayer will be able to claim the balance of the credit when filing the 2020 return. If, on the other hand, the advance rebate received was greater than the credit to which the taxpayer is entitled, the taxpayer won't have to pay back the excess. That is because the 2020 credit can't be reduced below zero.
If an advance rebate was made or allowed for a joint return, half of the rebate is treated as having been made or allowed to each spouse who filed the joint return.
Observation. Thus, if taxpayers filed a joint return for 2019 and received an advance rebate, but were divorced or filed separate returns for 2020, each individual will take into account half of the advance rebate when reducing the credit allowed for 2020.
Identification number requirement. No credit will be allowed to an eligible individual who doesn't include the individual's valid identification number on the tax return for the tax year.
On a joint return, the valid identification number of the individual's spouse must be included. But this requirement doesn't apply if at least one spouse was a member of the U.S. Armed Forces at anytime during the tax year and at least one spouse's valid identification number is included on the joint return.
If a qualifying child is taken into account in figuring the credit, the child's valid identification number must also be included on the return.
A "valid identification number" means a social security number, as defined in Code Sec. 24(h)(7). For a qualifying child who is adopted or placed for adoption, the child's adoption taxpayer identification number is a valid identification number.
Observation. Under Code Sec. 24(h)(7), a "social security number" must be issued by the Social Security Administration to a U.S. citizen or to an alien who is eligible to be employed in the U.S. Also, the number must have been issued by the due date of the return. An omission of a correct valid identification number is treated as a mathematical or clerical error that can be summarily assessed without using the deficiency procedures. (Code Sec. 6428(g), as added by Act Sec. 2201(a))
Regulations. IRS is to prescribe regs and other guidance as necessary to carry out the purposes of the credit provision, including appropriate measures to avoid allowing a taxpayer to receive multiple credits or rebates. (Code Sec. 6428(h), as added by Act Sec. 2201(a))
No 10% additional tax for coronavirus-related retirement plan distributions
Background. A distribution from a qualified retirement plan is subject to a 10% additional tax unless the distribution meets an exception under Code Sec. 72(t).
New law. The CARES Act provides that the Code Sec. 72(t) 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. (Act Sec. 2202(a)(1))
A coronavirus-related distribution is any distribution (subject to dollar limits discussed below), made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan (defined in Code Sec. 402(c)(8)(B)), made to a qualified individual. (Act Sec. 2202(a)(4)(A))
A qualified individual is an individual (1) who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC), (2) whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, or (3) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury. (Act Sec. 2202(a)(4)(A)(ii))
The administrator of an eligible retirement plan may rely on an employee's certification that the employee satisfies the conditions of (3) above in determining whether any distribution is a coronavirus-related distribution. (Act Sec. 2202(a)(4)(B))
Limit on distribution. The aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any tax year cannot not exceed $100,000. (Act Sec. 2202(a)(2)(A))
If a distribution to an individual would (without regard to the $100,000 limit in Act Sec. 2202(a)(2)(A)) be a coronavirus-related distribution, a plan is not treated as violating the Code merely because the plan treats such distribution as a coronavirus-related distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000. (Act Sec. 2202(a)(2)(B))
Distribution can be contributed back to retirement plan. Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Sec. 402(c), Code Sec. 403(a)(4), Code Sec. 403(b)(8), Code Sec. 408(d)(3), or Code Sec. 457(e)(16), as the case may be. (Act Sec. 2202(a)(3)(A))
If a contribution is made pursuant to Act Sec. 2202(a)(3)(A) with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer is, to the extent of the amount of the contribution, treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in Code Sec. 402(c)(4)) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (Act Sec. 2202(a)(3)(B))
If a contribution is made pursuant to Act Sec. 2202(a)(3)(A) with respect to a coronavirus-related distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the coronavirus-related distribution is treated as a distribution described in Code Sec. 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution. (Act Sec. 2202(a)(3)(C))
Distribution can be included in income over three years. In the case of any coronavirus-related distribution, unless the taxpayer elects not to, any amount required to be included in gross income for such tax year will be so included ratably over the 3-taxyear period beginning with such tax year. (Act Sec. 2202(a)(5)(A)) For this purpose, rules similar to the rules of Code Sec. 408A(d)(3)(E) apply. (Act Sec. 2202(a)(5)(B))
Also, a coronavirus-related distribution is treated as meeting the requirements of Code Sec. 401(k)(2)(B)(i), Code Sec. 403(b)(7)(A)(i), Code Sec. 403(b)(11), Code Sec. 457(d)(1)(A), and 5 USC 8433(h)(1). (Act Sec. 2202(a)(6)(B))
Loans from qualified plans. The CARES Act provides flexibility for loans from certain retirement plans for coronavirus-related relief. (Act Sec. 2202(b))
Effective date. Act Sec. 2202 applies to distributions made on or after January 1, 2020, and before December 31, 2020. (Act Sec. 2202(a)(4)(A))
RMD requirement waived for 2020
Background. In general, Code Sec. 401(a)(9) requires a retirement plan or IRA owner to take required minimum distributions (RMDs) annually once the owner reaches age 72.
New law. The CARES Act provides that the RMD requirements do not apply for calendar year 2020 to: (I) a defined contribution plan described in Code Sec. 403(a) or Code Sec. 403(b); (II) a defined contribution plan which is an eligible deferred compensation plan described in Code Sec. 457(b) but only if such plan is maintained by an employer described in Code Sec. 457(e)(1)(A); or (III) an individual retirement plan. (Code Sec. 401(a)(9)(I)(i), as amended by Act Sec. 2203(a))
The RMD requirements also do not apply to any distribution which is required to be made in calendar year 2020by reason of: (I) a required beginning date occurring in calendar year 2020, and (II) such distribution not having been made before January 1, 2020. (Code Sec. 401(a)(9)(I)(ii), as amended by Act Sec. 2203(a))
For purposes of the Code Sec. 401(a)(9) RMD rules: (I) the required beginning date with respect to any individual is determined without regard to the temporary RMD waiver rules of Code Sec. 401(a)(9)(I) for purposes of applying the RMD rules for calendar years after 2020; and (II) if the 5-year rule of Code Sec. 401(a)(9)(B)(ii) applies (in general requiring a retirement plan to distribute its assets within five years of the death of the employee), the 5-year period is determined without regard to calendar year 2020. (Code Sec. 401(a)(9)(I)(iii),as amended by Act Sec. 2203(a))
Eligible rollover distributions. If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under Code Sec. 401(a)(9) had applied during 2020, such distribution is not be treated as an eligible rollover distribution for purposes of Code Sec. 401(a)(31), Code Sec. 3405(c), or Code Sec. 402(f). (Code Sec. 402(c)(4), as amended by Act Sec. 2203(b))
Effective date. The amendments made by Act Sec. 2203 apply for calendar years beginning after December 31, 2019. (Act Sec. 2203(c)(1))
If Act Sec. 2203(c)(2) applies to any pension plan or contract amendment (see below), such pension plan or contract does not fail to be treated as being operated in accordance with the terms of the plan during the period beginning on the date of enactment of the Act and ending on December 31, 2020, solely because the plan operates in accordance with the temporary RMD suspension rules of Act Sec. 2203. In addition, except as provided by the Secretary of the Treasury, such plan or contract does not fail to meet the requirements of Code Sec. 411(d)(6) (Sec. 204(g) of the Employee Retirement Income Security Act of 1974) by reason of such amendment. (Act Sec. 2203(c)(2)(A))
Act Sec. 2203(c)(2) applies to any amendment to any pension plan or annuity contract which: (I) is made pursuant to the amendments made by Act Sec. 2203; and (II) is made on or before the last day of the first plan year beginning on or after January 1, 2022. (Act Sec. 2203(c)(2)(B)(i)) In the case of a governmental plan, clause (II) is applied by substituting''2024'' for ''2022''. (Act Sec. 2203(c)(2)(B)(i))
Act Sec. 2203(c)(2) does not apply to any amendment unless during the period beginning on the date of enactment of the Act and ending on December 31, 2020, the plan or contract is operated as if such plan or contract amendment were in effect. (Act Sec. 2203(c)(2)(B)(ii))
$300 above-the-line charitable deduction
Background. Adjusted gross income is gross income less certain deductions. (Code Sec. 62(a))
New law. The CARES Act adds a deduction to the calculation of gross income, in the case of tax years beginning in 2020, for the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the tax year. (Code Sec. 62(a)(22), as amended by Act Sec. 2204(a))
For this purpose, the term "eligible individual" means any individual who does not elect to itemize deductions. (Code Sec. 62(f)(1), as amended by Act Sec. 2204(b))
The term "qualified charitable contribution" means a charitable contribution (as defined in Code Sec. 170(c)): (A) which is made in cash; (B) for which a deduction is allowable under Code Sec. 170 (determined without regard Code Sec. 170(b)); (C) which is made to an organization described in Code Sec. 170(b)(1)(A), and not to an organization described in Code Sec. 509(a)(3); and (D) which is not for the establishment of anew, or maintenance of an existing, donor advised fund (as defined in Code Sec. 4966(d)(2)). In addition, a qualified charitable contribution does not include any amount which is treated as a charitable contribution made in such tax year by reason of Code Sec. 170(b)(1)(G)(ii) or Code Sec. 170(d)(1). (Code Sec. 62(f)(2), as amended by Act Sec. 2204(b))
Effective date. The amendments made by Act Sec. 2204 apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2204(c))
Modification of limitations on individual cash charitable contributions during 2020
Background. Individuals are allowed a deduction for cash contributions to certain charitable organizations (such as churches, educational organizations, hospitals, and medical research organizations) up to 60% of their contribution base (generally, adjusted gross income (AGI)). (Code Sec. 170(b)(1)(G)(i)) If the aggregate amount of an individual's cash contributions to these charities for the year exceeds 60% of the individual's contribution base, then the excess is carried forward and is treated as a deductible charitable contribution in each of the five succeeding tax years. (Code Sec. 170(b)(1)(G)(ii))
New law. The CARES Act provides that (except as stated below) qualified contributions are disregarded in applying the 60% limit on cash contributions of individuals and the Code Sec. 170(d)(1) rules on carryovers of excess contributions. (Act Sec. 2205(a)(1))
Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of the individual's contribution base over the amount of all other charitable contributions allowed as deductions for the contribution year. (Act Sec. 2205(a)(2)(A)(i))
Qualified contributions are charitable contributions if---
1. They are paid in cash during calendar year 2020 to an organization described in Code Sec. 170(b)(1)(A) (i.e., 501(c)(3) and certain other charitable organizations); and
2. The taxpayer has elected to apply this provision with respect to the contribution. (Act Sec. 2205(a)(3)(A))
However, contributions to a Code Sec. 509(a)(3) supporting organization or a donor advised fund are not qualified contributions. (Act Sec. 2205(a)(3)(B))
In the case of a partnership or S corporation, the election in item (2) above is made separately by each partner or shareholder. (Act Sec. 2205(a)(3)(C))
If the aggregate amount of qualified contributions exceeds the limitation in Act Sec. 2205(a)(2)(A)(i), the excess is added to the individual's carryover amount described in Code Sec. 170(b)(1)(G)(ii).(Act Sec. 2205(a)(2)(A)(ii))
Effective date. The amendments made by Act Sec. 2205(a) apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2205(c))
Modification of limitations on corporate cash charitable contributions during 2020
Background. A corporation's charitable deduction cannot exceed 10% of its taxable income, as computed with certain modifications. (Code Sec. 170(b)(2)(A)) If a corporation's charitable contributions for a year exceed the 10% limitation, the excess is carried over and deducted for each of the five succeeding years in order of time, to the extent the sum of carryovers and contributions for each of those years does not exceed 10% of taxable income. (Code Sec. 170(d)(2)(A))
New law. The CARES Act provides that (except as stated below) qualified contributions (see above) are disregarded in applying the 10% limit on charitable contributions of corporations and the Code Sec. 170(d)(1) rules on carryovers of excess contributions. (Act Sec. 2205(a)(1))
Qualified contributions are allowed as a deduction only to the extent that the aggregate of those contributions does not exceed the excess of 25% of the corporation's taxable income (as computed under Code Sec. 170(b)(2)) over the amount of all other charitable contributions allowed to the corporation as deductions for the contribution year. (Act Sec. 2205(a)(2)(B)(i))
If the aggregate amount of qualified contributions exceeds the limitation in the previous paragraph, the excess is taken into account under the Code Sec. 170(d)(2) carryover rule, subject to its limitations. (Act Sec. 2205(a)(2)(B)(ii))
Effective date. The amendments made by Act Sec. 2205(a) apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2205(c))
Increase in limits on contributions of food inventory
Background. A donation of food inventory to a charitable organization that will use it for the care of the ill, the needy, or infants is deductible in an amount up to basis plus half the gain that would be realized on the sale of the food (not to exceed twice the basis). In the case of a C corporation, the deduction cannot exceed 15% of the corporation's income. In the case of a taxpayer other than a C corporation, the deduction cannot exceed 15% of aggregate net income of the taxpayer for that tax year from all trades or businesses from which those contributions were made, computed without regard to the taxpayer's charitable deductions for the year. (Code Sec. 170(e)(3)(C))
New Law. In the case of any charitable contribution of food during 2020 to which Code Sec. 170(e)(3)(C) applies, the taxable income limits are 25% rather than 15%. (Act Sec. 2205(b))
Effective date. The amendments made by Act Sec. 2205(b) apply to tax years beginning after Dec. 31, 2019. (Act Sec. 2205(c))
Tax-excluded education payments by an employer temporarily include student loan repayments
Background. An employee's gross income doesn't include up to $5,250 per year of employer payments, in cash or kind, made under an educational assistance program for the employee's education (but not the education of spouses or dependents). (Code Sec. 127)
New law. The CARES Act adds to the types of educational payments that are excluded from employee gross income" eligible student loan repayments" (below) made before January 1, 2021. The payments are subject to the overall $5,250 per employee limit for all educational payments.
Eligible student loan repayments are payments by the employer, whether paid to the employee or a lender, of principle or interest on any qualified higher education loan as defined in Code Sec 221(d)(1) for the education of the employee (but not of a spouse or dependent).(Code Sec 127(c)(1)(B), as amended by Act Sec. 2206(a))
To prevent a double benefit, student loan repayments for which the exclusion is allowable can't be deducted under Code Sec 221 (which allows the deduction of student loan interest subject to a dollar limit and a phase-out above specified taxpayer income levels.) (Code Sec. 221(e)(1), as amended by Act Sec. 2206(b))
Effective date. The amendments made by Act Sec. 2206 apply to payments made after the date of enactment of the Act. (Act Sec. 2206(c))
Checkpoint subscribers can find the latest tax and accounting news and analysis related to the ongoing COVID-19 (coronavirus) pandemic by searching or navigating to our new COVID-19 Guidance folder. This folder can be accessed from the top of the Table of Contents or included in searches (be sure to select it). The folder will be available beginning at 3:00 PM ET on Friday, March 27.
Employee retention credit for employers
New law. This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. (Act Sec. 2301(a))
Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. (Act Sec. 2301(c)(2))
The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (Act Sec. 2301(j))
Wages paid to which 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. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. (Act Sec. 2301(c)(3)(A))
No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (Code Sec. 21) with respect to the employee. (Act Sec. 2301(h)(1))
Wages. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. ((Act Sec. 2301(c)(3)(C); Act Sec. 2301(b)(1))
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 Act (part of P.L. 116-127) (Act Sec. 2301(c)(3)(A)), nor for wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave. (Act Sec. 2301(h)(2))
Other. IRS is granted authority to advance payments to eligible employers (Act Sec. 2301(l)(1)) and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit. (Act Sec. 2301(k))
Effective date. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021. (Act Sec. 2301(m))
Delay of payment of employer payroll taxes
Background. Employers are required to withhold social security taxes (Code Sec. 3111(a)) and tax under the Railroad Retirement Tax Act (RRTA) from wages paid to employees. (Code Sec. 3211(a) and Code Sec. 3221(a)). Self-employed individuals are subject to self-employment (SECA) tax. (Code Sec. 1401(a))
New law. The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for "applicable employment taxes" for the "payroll tax deferral period" won't be due before the "applicable date." (Act Sec. 2302(a)(1))
For purposes of the above rules, the term ''applicable employment taxes'' means: (A) the taxes imposed under Code Sec. 3111(a) (social security taxes), (B) so much of the taxes imposed under Code Sec. 3211(a) as are attributable to the rate in effect under Code Sec. 3111(a), and (C) so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(a) (RRTA taxes). (Act Sec. 2302(d)(1))
The term ''payroll tax deferral period'' means the period beginning on the date of enactment of the Act and ending before Jan. 1, 2021. (Act Sec. 2302(d)(2))
The term ''applicable date'' means: (A) Dec. 31, 2021, with respect to 50% of the amounts to which Act Sec. 2302(a) (employment taxes) and Act Sec. 2302(b) (self-employment tax), as the case may be, apply, and (B) Dec. 31, 2022, with respect to the remaining 50% of those amounts. (Act Sec. 2302(d)(3))
Notwithstanding Code Sec. 6302 (which authorizes IRS to set deadlines for tax deposits), an employer will be treated as having timely made all deposits of applicable employment taxes required (without regard to Act Sec. 2302) to be made during the payroll tax deferral period if all such deposits are made not later than the applicable date. (Act Sec. 2302(a)(2))
The above rules won't apply to any taxpayer which has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102, or indebtedness forgiven under Act Sec. 1109. (Act Sec. 2302(a)(3))
Notwithstanding any other provision of law, the payment for 50% of the taxes imposed under Code Sec. 1401(a) (self-employment taxes) for the payroll tax deferral period won't be due before the applicable date. (Act Sec. 2302(b)(1))
For purposes of applying Code Sec. 6654 (requiring individuals to make estimated tax payments) to any tax year which includes any part of the payroll tax deferral period, 50% of the self-employment taxes imposed under Code Sec. 1401(a) for the payroll tax deferral period won't be treated as taxes to which Code Sec. 6654 applies. (Act Sec. 2302(b)(2))
For purposes of Code Sec. 3504 (imposing third party liability for withholding tax), in the case of any person designated under that section (and any regulations or other guidance issued by IRS with respect to that section) to perform acts otherwise required to be performed by an employer, if an employer directs that person to defer payment of any applicable employment taxes during the payroll tax deferral period under Act Sec. 2302, the employer will be solely liable for the payment of the applicable employment taxes before the applicable date for any wages paid by that that person on behalf of that employer during that period. (Act Sec. 2302(c)(1))
For purposes of Code Sec. 3511 (which requires certified professional employer organizations (CPEOs) to be treated as employers for employment tax withholding purposes), in the case of a CPEO (as defined in Code Sec. 7705(a)) that has entered into a service contract described in Code Sec. 7705(e)(2) with a customer, if that customer directs that CPEO to defer payment of any applicable employment taxes during the payroll tax deferral period under this section, the customer will, notwithstanding Code Sec. 3511(a) and Code Sec. 3511(c), be solely liable for the payment of those applicable employment taxes before the applicable date for any wages paid by the CPEO to any worksite employee performing services for that customer during that period. (Act Sec. 2302(c)(2))
Effective date . The provisions of Act Sec. 2302 apply to the period beginning on the date of enactment of the Act. (Act Sec. 2302(d)(2))
Temporary repeal of taxable income limitation for net operating losses (NOLs)
Old law. Under Code Sec. 172(a) the amount of the NOL deduction is equal to the lesser of (1) the aggregate of the NOL carryovers to such year and NOL carrybacks to such year, or (2) 80% of taxable income computed without regard to the deduction allowable in this section. Thus, NOLs are currently subject to a taxable-income limitation and can't fully offset income.
New law. The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. (Code Sec. 172(a), as amended by Act Sec. 2303(a)(1))
Effective date. The amendments made by Act Sec. 2303(a) apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning after Dec. 31, 2017 are carried. (Act Sec. 2303(d)(1))
Modification of rules relating to net operating loss (NOL) carrybacks
Old law. Code Sec. 172(b)(1) provides that, except for farming losses and losses of property and casualty insurance companies, an NOL for any tax year is carried forward to each tax year following the tax year of the loss but isn't carried back to any tax year preceding the tax year of the loss.
New law. The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. (Code Sec. 172(b)(1) as amended by Act Sec. 2303(b)(1))
Effective date. The amendments made by Act Sec. 2303(b) apply to NOLs arising in tax years beginning after Dec. 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried. (Act Sec. 2303(d)(2))
Modification of limitation on losses for noncorporate taxpayers
Old law. Code Sec. 461(l)(1) disallows the deduction of excess business losses by noncorporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. Generally, Code Sec. 461(l)(3)(A) provides that an "excess business loss" is the excess of the (1) taxpayer's aggregate trade or business deductions for the tax year over (2) the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).
New law. The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))
Effective date. The amendments made by Act Sec. 2304(a) apply to tax years beginning after Dec. 31, 2017. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))
Corporate minimum tax credit (MTC) is accelerated
Background. Corporations (for which the alternative minimum tax was repealed for tax years after 2017) may claim outstanding MTCs (subject to limits) for tax years before 2021, at which time any remaining MTC may be claimed as fully refundable. Thus, under Code Sec. 53(e), the MTC is refundable for any tax year beginning in 2018, 2019, 2020, or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. (Code Sec. 53(e))
New law. The CARES Act changes ''2018, 2019, 2020, or 2021'' (above) to ''2018 or 2019," and changes "(100% for tax years beginning in 2021)" to "(100% for tax years beginning in 2019)" (Code Sec. 53(e)(1), as amended by Act Sec. 2305(a), and Code Sec. 53(e)(2), as amended by Act Sec. 2305(a))
Observation. Thus, the CARES Act allows corporations to claim 100% of AMT credits in 2019.
The CARES Act also provides for an election to take the entire refundable credit amount in 2018. (Code Sec. 53(e)(5), as amended by Act Sec. 2305(b)(1))
Under the CARES Act, a claim for credit or refund where a corporation elects to take the entire refundable credit amount in 2018 must be treated as made under Code Sec. 6411, i.e., as a tentative carryback refund claim. (Act Sec. 2305(d)(1))
Taxpayers may file an application for a tentative refund of any amount for which a refund is due by reason of an election under Code Sec. 53(e)(5). The application, which must be filed before Dec. 31, 2020, must be in the manner and form IRS provides, must be verified in the same manner as an application for a tentative carryback adjustment, and must set forth: (a) the amount of the refundable credit claimed under Code Sec. 53(e) for the tax year, (b) the amount of the refundable credit claimed under Code Sec. 53(e) for any previously filed return for the tax year, and (c) the amount of the refund claimed. (Act Sec. 2305(d)(2)(A))
Within 90 days from the date the application is filed, IRS must: (i) review the application, (ii) determine the amount of the overpayment, and (iii) apply, credit, or refund the overpayment, in a manner similar to that provided in Code Sec. 6411(b) (allowance of tentative carryback adjustments). (Act Sec. 2305(d)(2)(B))
For an application made by a corporation filing a consolidated return, the rules of Code Sec. 6411(c) apply to an adjustment, to the extent IRS provides. (Act Sec. 2305(d)(2)(C))
Effective date. The amendments made by Act Sec. 2305 apply to tax years beginning after December 31, 2017. (Act Sec. 2305(c))
Deductibility of interest expense temporarily increased
Background. The Tax Cuts and Jobs Act of 2017 (P.L. 115-97, the “TCJA”) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income. (Code Sec. 163(j)(10))
New law. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. (Code Sec. 163(j)(10)(A)(i) as amended by Act Sec. 2306(a))
Special rules for partnerships. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020). (Code Sec. 163(j)(10)(A)(ii)(I) as amended by Act Sec. 2306(a)) For partners that don't elect out, any excess business interest of the partnership for any tax year beginning in 2019 that is allocated to the partner will be treated as follows (Code Sec. 163(j)(10)(A)(ii)(II) as amended by Act Sec. 2306(a)):
…50% of the excess business interest will be treated as paid or accrued by the partner in the partner's first tax year beginning in 2020 and isn't subject to any limits in 2020. (Code Sec. 163(j)(10)(A)(ii)(II)(aa) as amended by Act Sec. 2306(a))
…50% of the excess business interest will be subject to the limitations of paragraph 163(j)(4)(B)(ii) (relating to the usual treatment of excess business interest allocated to partners) in the same manner as any other excess business interest that is so allocated. (Code Sec. 163(j)(10)(A)(ii)(II)(bb) as amended by Act Sec. 2306(a)) In other words, it will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to Code Sec. 163(j)).
Election out of the increased limitation. Taxpayers may elect out of the increase, for any tax year, in the time and manner IRS prescribes. Once made, the election can be revoked only with IRS consent. For partnerships, the election must be made by the partnership and can be made only for tax years beginning in 2020. (Code Sec. 163(j)(10)(A)(iii) as amended by Act Sec. 2306(a))
Election to calculate 2020 interest limitation using 2019 adjusted taxable income. In addition, taxpayers can elect to calculate the interest limitation for their tax year beginning in 2020 using the adjusted taxable income for their last tax year beginning in 2019 as the relevant base. For partnerships, this election must be made by the partnership. (Code Sec. 163(j)(10)(B)(i) as amended by Act Sec. 2306(a))
If an election is made to calculate the interest limitation using 2019 adjusted taxable income for a tax year that is a short tax year, the adjusted taxable income for the taxpayer's last tax year beginning in 2019 which is substituted under the election will be equal to the amount which bears the same ratio to such adjusted taxable income as the number of months in the short taxable year bears to 12. (Code Sec. 163(j)(10)(B)(ii) as amended by Act Sec. 2306(a))
Effective date. The amendments made by Act Sec. 2306 apply to tax years beginning after Dec. 31, 2018. (Act Sec. 2306(b))
Bonus depreciation technical correction for qualified improvement property
Background. The Tax Cuts and Jobs Act of 2017 (P.L. 115-97, the "TCJA") amended Code Sec. 168 to allow 100% additional first-year depreciation deductions ("100% Bonus Depreciation") for certain qualified property. The TCJA eliminated pre-existing definitions for (1) qualified leasehold improvement property, (2) qualified restaurant property, and (3) qualified retail improvement property. It replaced those definitions with one category called qualified improvement property ("QI Property"). A general 15-year recovery period was intended to have been provided for QI Property. However, that specific recovery period failed to be reflected in the statutory text of the TCJA. Thus, under the TCJA, QI Property falls into the 39-year recovery period for nonresidential rental property. That makes the QI Property category ineligible for 100% Bonus Depreciation.
New law. The CARES Act provides a technical correction to the TCJA, and specifically designates QI Property as 15-year property for depreciation purposes. (Code Sec. 168(e)(3)(E)(vii), as amended by Act Sec. 2307(a)(1)(A)) This makes QI Property a category eligible for 100% Bonus Depreciation. QI property also is specifically assigned a 20-year class life for the Alternative Depreciation System. (Code Sec. 168(g)(3)(B), as amended by Act Sec. 2307(a)(3)(B))
Effective date. The amendments made by Act Sec. 2307 are effective for property placed in service after Dec. 31, 2017. (Act Sec. 2307(b))
Checkpoint subscribers can find the latest tax and accounting news and analysis related to the ongoing COVID-19 (coronavirus) pandemic by searching or navigating to our new COVID-19 Guidance folder. This folder can be accessed from the top of the Table of Contents or included in searches (be sure to select it). The folder will be available beginning at 3:00 PM ET on Friday, March 27.
• 10% - up to $19,050 (MFJ; $9,525 single individual)
• 12% - $19,050 to $77,400 (MFJ; $9,525 - $38,700 single individual)
• 22% - $77,400 to $165,000 (MFJ; $38,700 - $82,500 single individual)
• 24% - $165,000 to $315,000 (MFJ; $82,500 - $157,500 single individual)
• 32% - $315,000 to $400,000 (MFJ; $157,500 - $200,000 single individual)
• 35% - $400,000 to $600,000 (MFJ; $200,000 - $500,000 single individual)
• 37% - $600,000+ (MFJ; $500,000+ single individual)
• $24,000 for married individuals filing a joint return,
• $18,000 for head-of-household filers, and
• $12,000 for all other taxpayers
Kiddie Tax Modified
• For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxed at preferential rates.
Capital Gains Provisions Conformed
• The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is taxed at maximum rates of 0%, 15%, or 20%.
• For 2018, the 15% breakpoint is:
o $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately),
o $51,700 for heads of household,
o $2,600 for trusts and estates, and $38,600 for other unmarried individuals.
• The 20% breakpoint is:
o $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately),
o $452,400 for heads of household,
o $12,700 for estates and trusts, and
o $425,800 for other unmarried individuals.
Gambling Loss Limitation Modified
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.
Child Tax Credit Increased
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000
o The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).
• Non-child dependents:
o In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
o The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount.
State and Local Tax Deduction Limited
• A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of
o State and local property taxes not paid or accrued in carrying on a trade or business or activity and
o State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year.
o Foreign real property taxes may not be deducted.
• Prepayment provision:
o A taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can't claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage & Home Equity Indebtedness Interest Deduction Limited
• The deduction for interest on home equity indebtedness is eliminated.
• The deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).
o Treatment of indebtedness incurred on or before Dec. 15, 2017. The new lower limit doesn't apply to any acquisition indebtedness incurred before Dec. 15, 2017.
o “Binding contract” exception. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.
o The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, so long as the indebtedness resulting from the refinancing doesn't exceed the amount of the refinanced indebtedness.
Medical Expense Deduction Threshold Temporarily Reduced
• For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers.
Charitable Contribution Deduction Limitation Increased
• For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under for cash contributions to public charities and certain private foundations is increased to 60%.
• Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.
No Deduction For Amounts Paid For College Athletic Seating Rights
• For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Alimony Deduction by Payor/Inclusion by Payee Suspended
• For any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.
Miscellaneous Itemized Deductions Suspended
• The deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes the deduction for tax preparation and investment advisory expenses.
Overall Limitation (“Pease” Limitation) on Itemized Deductions Suspended
• New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limitation” (the itemized deduction phase-out for higher-income individuals) on itemized deductions is suspended.
Moving Expenses Deduction Suspended
• The deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. This also precludes tax-free moving reimbursements provided by an employer.
Repeal of Obamacare Individual Mandate
• For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero.
o The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
Alternative Minimum Tax (AMT)
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:
o For joint returns and surviving spouses, $109,400.
o For single taxpayers, $70,300.
o For marrieds filing separately, $54,700.
• Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the AMTI of the taxpayer exceeds the phase-out amounts, increased as follows:
o For joint returns and surviving spouses, $1 million.
o For all other taxpayers (other than estates and trusts), $500,000.
o For trusts and estates, the pre-inflation adjustment exemption amount of $22,500 and phase-out amount of $75,000 remain unchanged.
Student Loan Interest
• Deduction retained
• Deduction retained
ABLE Account Changes
ABLE Accounts under Code Sec. 529A provide individuals with disabilities and their families the ability to fund a tax preferred savings account to pay for “qualified” disability related expenses. Contributions may be made by the person with a disability (the “designated beneficiary”), parents, family members or others. Under pre-Act law, the annual limitation on contributions is the amount of the annual gift-tax exemption ($15,000 in 2018).
• Effective for tax years beginning after the enactment date and before Jan. 1, 2026, the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year.
• Saver's credit eligible. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account.
• For distributions after the date of enactment, amounts from qualified tuition programs (QTPs, also known as 529 accounts; see below) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Expanded Use of 529 Account Funds
• New law. For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
Student Loan Discharged on Death Or Disability
• Certain student loans that are discharged (forgiven) on account of death or total and permanent disability of the student are also excluded from gross income.
New Deferral Election for Qualified Equity Grants
• Generally effective with respect to stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017 (subject to a transition rule; see below), a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by the employer.
• The election applies only for income tax purposes; the application of FICA and FUTA is not affected.
• The election must be made no later than 30 days after the first time the employee's right to the stock is substantially vested or is transferable, whichever occurs earlier.
2016 “Net Disaster Loss” Relief Available to Non-Itemizers & Taxpayers Subject to AMT
• In general, no personal casualty loss can be claimed by a taxpayer who claims the standard deduction. Such losses can only be claimed as itemized deductions.
• Effective for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, if an individual has a net disaster loss (defined below) for any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, the standard deduction is increased by the net disaster loss.
Relief from Early Withdrawal Tax for “Qualified 2016 Disaster Distributions”
• The Act provides an exception to the retirement plan 10% early withdrawal tax for up to $100,000 of “qualified 2016 disaster distributions.” These distributions are defined as distributions from an eligible retirement plan made (a) on or after Jan. 1, 2016, and before Jan. 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area and who has sustained an economic loss by reason of the events that gave rise to the Presidential disaster declaration. An “eligible retirement plan” means a qualified retirement plan, a section 403(b) plan or an IRA.
Certain Self-Created Property Not Treated as Capital Asset
• Under pre-Act law, property held by a taxpayer (whether or not connected with the taxpayer's trade or business) is generally considered a capital asset.
o However, certain assets are specifically excluded from the definition of a capital asset, including inventory property, depreciable property, and certain self-created intangibles (e.g., copyrights, musical compositions).
• Effective for dispositions after Dec. 31, 2017, the Act amends Code Sec. 1221(a)(3), resulting in the exclusion of patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created), from the definition of a “capital asset.”
Estate and Gift Tax Retained, with Increased Exemption Amount
• Under pre-Act law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” was $5.6 million ($11.2 million for a married couple).
• New law:
o For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million.
HIGHLIGHTED BUSINESS TAX CHANGES IN THE “TAX CUTS AND JOBS ACT”
Corporate Tax Rates Reduced
• For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate.
Dividends-Received Deduction Percentages Reduced
• The 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.
Corporate Alternative Minimum Tax Repealed
• For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed.
Increased Code 179 Expensing
• For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million (was $500k), and the phase-out threshold amount is increased to $2.5 million of total purchases.
Temporary 100% Cost Recovery of Qualifying Business Assets
• A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 The additional first-year depreciation deduction is allowed for new and used property.
o The Act refers to the new 100% depreciation deduction in the placed-in-service year as “100% expensing,” but the tax break should not be confused with expensing under Code Sec. 179, which is subject to entirely separate rules (see above).
• For certain plants bearing fruit or nuts planted or grafted after Sept. 27, 2017, and before Jan. 21, 2023, the 100% first-year deduction is also available.
Luxury Automobile Depreciation Limits Increased
• For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year depreciation deduction under Code Sec. 168(k) is not claimed, the maximum amount of allowable depreciation is increased to:
o $10,000 for the year in which the vehicle is placed in service,
o $16,000 for the second year,
o $9,600 for the third year, and
o $5,760 for the fourth and later years in the recovery period.
• In addition, computer or peripheral equipment is removed from the definition of listed property, and so isn't subject to the heightened substantiation requirements that apply to listed property.
New Farming Equipment and Machinery Is 5-Year Property
• For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer.
Recovery Period for Real Property Shortened
• For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated, a general 15-year recovery period and straight-line depreciation are provided for qualified improvement property.
• Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.
Limits on Deduction of Business Interest
• For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income.
• The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships.
o An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million.
Modification of Net Operating Loss Deduction
• For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed, but a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.
• For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the deduction).
Domestic Production Activities Deduction Repealed
• For tax years beginning after Dec. 31, 2017, the DPAD is repealed.
Like-Kind Exchange Treatment Limited
• Generally effective for transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property that is not held primarily for sale.
Five-Year Writeoff of Specified R&E Expenses
• For amounts paid or incurred in tax years beginning after Dec. 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside of the U.S.), beginning with the midpoint of the tax year in which the specified R&E expenses were paid or incurred.
Employer's Deduction for Fringe Benefit Expenses Limited
• For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related.
• The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
• Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained.
o In addition, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee.
No Deduction for Amounts Paid For Sexual Harassment Subject to Nondisclosure Agreement
• A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business. However, among other exceptions, there's no deduction for: any illegal bribe, illegal kickback, or other illegal payment; certain lobbying and political expenses; any fine or similar penalty paid to a government for the violation of any law; and two-thirds of treble damage payments under the antitrust laws.
• New law:
o Under the Act, effective for amounts paid or incurred after the enactment date, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
Employee Achievement Awards
• Employee achievement awards are excludable to the extent the employer can deduct the cost of the award—generally limited to $400 for any one employee, or $1,600 for a “qualified plan award.”
o An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation.
• New law:
o For amounts paid or incurred after Dec. 31, 2017, a definition of “tangible personal property” is provided:
Tangible personal property does not include cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than where from the employer pre-selected or pre-approved a limited selection) vacations, meals, lodging, tickets for theatre or sporting events, stock, bonds or similar items. and other non-tangible personal property. No inference is intended that this is a change from present law and guidance.
Deduction for Local Lobbying Expenses Eliminated
• For amounts paid or incurred on or after the date of enactment, the deduction for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) is eliminated.
Rehabilitation Credit Limited
• For amounts paid or incurred after Dec. 31, 2017, the 10% credit for qualified rehabilitation expenditures with respect to a pre-'36 building is repealed and a 20% credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure which can be claimed ratably over a 5-year period beginning in the tax year in which a qualified rehabilitated structure is placed in service.
New Credit for Employer-Paid Family and Medical Leave
• For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is 50% of the wages normally paid to an employee.
o All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave (all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis).
Taxable Year of Inclusion
• In general, for a cash basis taxpayer, an amount is included in income when actually or constructively received.
• For an accrual basis taxpayer, an amount is included in income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (i.e., when the “all events test” is met), unless an exception permits deferral or exclusion.
o A number of exceptions that exist to permit deferral of income relate to advance payments. An advance payment is when a taxpayer receives payment before the taxpayer provides goods or services to its customer. The exceptions often allow tax deferral to mirror financial accounting deferral (e.g., income is recognized as the goods are provided or the services are performed).
• New law:
o Generally for tax years beginning after Dec. 31, 2017, a taxpayer is required to recognize income no later than the tax year in which such income is taken into account as income on an applicable financial statement (AFS) or another financial statement under rules specified by IRS (subject to an exception for long-term contract income under Code Sec. 460).
o The Act also codifies the current deferral method of accounting for advance payments for goods and services provided by Rev Proc 2004-34 to allow taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if such income also is deferred for financial statement purposes.
Cash Method of Accounting
• For tax years beginning after Dec. 31, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
o Under the gross receipts test, taxpayers with annual average gross receipts that do not exceed $25 million for the three prior tax years are allowed to use the cash method.
• Use of this provision results in a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Accounting for Inventories
• Under pre-Act law, businesses that are required to use an inventory method must generally use the accrual accounting method.
o However, the cash method could be used for certain small businesses that meet a gross receipt test with average gross receipts of not more than $1 million.
• New law:
o For tax years beginning after Dec. 31, 2017, taxpayers that meet the $25 million gross receipts test are not required to account for inventories as mentioned above, but rather may use an accounting method for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.
• Use of this provisions results is a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Capitalization and Inclusion of Certain Expenses in Inventory Costs
• The uniform capitalization (UNICAP) rules generally require certain direct and indirect costs associated with real or tangible personal property manufactured by a business to be included in either inventory or capitalized into the basis of such property.
o Under pre-Act law, a business with average annual gross receipts of $10 million or less in the preceding three years is not subject to the UNICAP rules for personal property acquired for resale.
• New law:
o For tax years beginning after Dec. 31, 2017, any producer or re-seller that meets the $25 million gross receipts test is exempted from the application of Code Sec. 263A.
• Use of this provision results is a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Accounting for Long-Term Contracts
• Under pre-Act law, an exception from the requirement to use the percentage-of-completion method (PCM) for long-term contracts was provided for construction companies with average annual gross receipts of $10 million or less in the preceding three years (i.e., small construction contracts) that met certain requirements.
o They were allowed to instead deduct costs associated with construction when they were paid and recognize income when the building was completed.
• New law:
o For contracts entered into after Dec. 31, 2017, in tax years ending after that date, the exception for small construction contracts from the requirement to use the PCM is expanded to apply to contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer that (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.
HIGHLIGHTED PASSTHROUGH TAX CHANGES IN THE “TAX CUTS AND JOBS ACT”
New Deduction for Pass-Through Income
• Under pre-Act law, the net income of these pass-through businesses— sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—was not subject to an entity-level tax and was instead reported by the owners or shareholders on their individual income tax returns. Thus, the income was effectively subject to individual income tax rates.
• New law:
o Generally, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new section, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:
(1) the lesser of:
(a) the “combined qualified business income amount” of the taxpayer, or
(b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
(2) the lesser of:
(i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or
(ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
• The “combined qualified business income amount” means, for any tax year, an amount equal to:
(i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer's QBI subject to the W-2 wage limitation; see below); plus
(ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year.
o For pass-through entities, other than sole proprietorships, the deduction cannot exceed the greater of:
(1) 50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
(2) the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.”
• Qualified property is defined in Code Sec. 199A(b)(6) as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
o The second limitation, which was newly added to the bill during Conference, apparently allows pass-through businesses to be eligible for the deduction on the basis of owning property that qualifies under the provision (e.g., real estate).
• For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages of the entity for the tax year.
• Thresholds and exclusions:
o The deduction does not apply to specified service businesses (i.e., trades or businesses described in Code Sec. 1202(e)(3)(A), but excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities).
o The service business limitation begins phasing out in the case of a taxpayer whose taxable income exceeds $315,000 for married individuals filing jointly ($157,500 for other individuals), both indexed for inflation after 2018.
• The new deduction for pass-through income is also available to specified agricultural or horticultural cooperatives.
Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there's still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here's a quick rundown of last-minute moves you should think about making:
LOWER TAX RATES
The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.
The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:
• If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you'll defer income from the conversion until next year and have it taxed at lower rates.
• Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won't be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
• If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. If you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.
• If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won't upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional's input.
DISAPPEARING OR REDUCED DEDUCTIONS / LARGER STANDARD DEDUCTION
Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here's what you can do about this right now:
• Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don't prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won't be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
• The itemized deduction for charitable contributions won't be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
• The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated and the standard deduction will be increased. If you won't be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
OTHER YEAR-END STRATEGIES
Here are some other last-minute moves that can save tax dollars in view of the new tax law:
• The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won't be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
• Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
• For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there's no deduction for such expenses. So if you've been thinking of entertaining clients and business associates, do so before year-end.
• The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you're in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you're getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
• Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
Please keep in mind that we've described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.