Additional 2020 economic impact payments

You’ve probably heard that the IRS will be making millions of ”economic impact payments” (also called ”recovery rebates”) in the near future to help people stay afloat during this time of economic uncertainty related to the COVID-19 crisis. These payments are in addition to the $1,200 payments ($2,400 for married couples) issued earlier in 2020. Here’s what you need to know about these additional payments.

Amount of payment. IRS has begun making payments of up to $600 to eligible taxpayers or up to $1,200 to married couples filing joint returns. Parents will get an additional $600 for each dependent child under age 17. Thus, a married couple with two children under 17 will get a $2,400 payment.

Who is eligible. U.S. citizens and residents are eligible for a full payment if their adjusted gross income (AGI) is under $75,000 for singles or marrieds filing separately, $112,500 for heads of household, and $150,000 for married couples filing jointly and surviving spouses. The recipient must not be the dependent of another taxpayer and must have a social security number that authorizes employment in the U.S.

Phaseout based on income. For individuals whose AGI exceeds the above thresholds, the payment amount is phased out at the rate of $5 for each $100 of income. Thus, the payment is completely phased out for single filers with AGI over $87,000 and for joint filers with no children with AGI over $174,000. For a married couple with two children, the payment will be completely phased out if their AGI exceeds $198,000.

Payments are nontaxable. The economic impact payment that you receive won’t be included in your income for tax purposes. It won’t cause you to owe tax or decrease your refund for 2020.

How to get a payment. The vast majority of people won’t have to do anything to get an economic impact payment. IRS will calculate and send the payment automatically to those who are eligible.

If you’ve filed your 2019 tax return, IRS will use the AGI and dependents from that return to calculate the payment amount. The credit won’t be allowed if the return doesn’t include a valid identification number (typically, a social security number) for each individual for whom a credit is sought. Thus, for example, a joint return must include valid identification numbers for both spouses to get the full $1200 credit. A $600 credit is allowed if only one spouse provides a valid identification number, and no credit is allowed if neither spouse does so.

IRS will deposit the payment directly into the bank account reflected on the return. IRS has developed a web-based tool called Get My Payment, www.irs.gov/coronavirus/get-my-payment, for individuals to provide banking information to IRS, so that payments can be received by direct deposit rather than by check sent in the mail. The tool includes the date the payment is scheduled to be issued to the individual.

If you have not yet filed for 2019. The due date for 2019 individual income tax returns was July 15, 2020, or October 15 if an automatic extension of time was requested on Form 4868. Individuals who are required to file a return for 2019 and haven’t done so should file the return as soon as possible. Doing so will help give IRS time to process and make all resulting economic impact payments before January 15, 2021 (the deadline for processing payments).

If you aren’t required to file. If you receive social security, supplemental security income, social security disability income, railroad retirement, or veterans’ compensation and pension benefits, and you aren’t required to file a tax return, you don’t have to file to receive a payment. IRS will generate an automatic payment using information from the Social Security Administration and the Department of Veterans Affairs. The payment will be made by direct deposit or paper check, in the same manner as the recipient’s regular benefits.

If you aren’t required to file a tax return and you don’t receive any of the above payments, you can register to receive an economic impact payment by providing information on IRS’s web-based Non-Filers: Enter Payment Info Here tool, www.irs.gov/coronavirus/non-filers-enter-payment-info.

Non-filers with dependent children; $600 payment. Non-filers who have a dependent child under age 17 must register their dependents on the Non-Filers: Enter Payment Info Here tool to receive the additional payment of $600 per child. Non-filers who receive the economic impact payment before registering a dependent child can still get the additional $600 payment by filing a 2020 income tax return on which the dependent is listed.

2020 COVID Relief Bill Provisions Affecting Businesses

Tax provisions made permanent (without other changes). The TCDTR makes permanent without other changes (1) the railroad track maintenance credit and (2) the exclusion of the aging period in determining the mandatory interest capitalization period in producing beer, wine or distilled spirits.

Tax provisions extended (without other changes). The TCDTR extends the following tax credits without other changes: (1) the new markets tax credit, (2) the work opportunity credit, (3) the employer credit for paid family and medical leave that was provided by the 2017 Tax Cuts and Jobs Act (2017 TCJA), (4) the carbon sequestration credit, (5) the business energy credit (the ‘‘Code Sec. 48 credit’’) both as regards termination dates and phase-downs of credit amounts, (6) the credit for electricity produced from renewable resources (the ‘‘Code Sec. 45 credit’’) and the election to claim the Code Sec. 48 credit instead for certain facilities (but the phase-down of the amount of the Code Sec. 45 credit for wind facilities isn’t deferred), (7) the Indian employment credit, (8) the mine rescue team training credit, (9) the American Samoa development credit, (10) the second generation biofuel producer credit, (11) the qualified fuel cell motor vehicle credit as applied to businesses, (12) the alternative fuel refueling property credit as applied to businesses, (13) the two-wheeled plug-in electric vehicle credit as applied to businesses, (14) the credit for production from Indian coal facilities, and (15) the energy efficient homes credit.

Additional provisions extended by the TCDTR without other changes are the following: (1) the exclusion from employee income of certain employer payments of student loans, (2) the 3-year recovery period for certain racehorses, (3) favorable cost recovery rules for business property on Indian reservations, (4) the 7-year recovery period for motor sports entertainment complexes, (5) expensing for film, television and live theatrical productions, (6) empowerment zone tax incentives except for the increased section 179 expensing for qualifying property and the deferral of capital gain for dispositions of qualifying assets, and (7) the exclusion from being personal holding company income for certain payments or accruals of dividends, interest, rents, and royalties from a related person that is a controlled foreign corporation.

Energy provisions. The TCDTR makes changes to energy provisions in addition to making them permanent or extending them.

The TCDTR adds ‘‘waste energy recovery property’’ to the types of property that qualify for the Code Sec. 48 credit (above). And the credit rate assigned is 30%. ‘‘Waste energy recovery property’’ is property (1) the construction of which begins before 2024, (2) that has a capacity of no more than 50 megawatts, and (3) generates electricity solely from heat from buildings or equipment if the primary purpose of that building or equipment isn’t the generation of electricity. But it doesn’t include property eligible for the Code Sec. 48 credit for cogeneration property unless the taxpayer doesn’t take the Code Sec. 48 credit for that property.

For wind facilities that are ‘‘qualified offshore wind facilities,’’ the TCDTR relaxes the rules under which wind facilities that are eligible for the Code Sec. 45 credit can, by election (see above), be eligible instead for the Code Sec. 48 credit.

The TCDTR makes permanent the energy efficient commercial buildings deduction. Additionally, the TCDTR indexes for inflation the per-square-foot dollar caps on the full and partial versions of the deduction. And the TCDTR provides that to the extent that deductibility depends on specified recognized energy efficient standards, the referred-to standards will be standards issued within two years of construction (rather than the standards bearing now-stale dates that applied under pre- TCDTR law).

Clarifications of tax consequences of PPP loan forgiveness. The COVIDTRA clarifies that the non-taxable treatment of Payroll Protection Program (PPP) loan forgiveness that was provided by the 2020 CARES Act also applies to certain other forgiven obligations. Also, the COVIDTRA clarifies that taxpayers whose PPP loans or other obligations are forgiven as described above, are allowed deductions for otherwise deductible expenses paid with the proceeds and that the tax basis and other attributes of the borrower’s assets won’t be reduced as a result of the forgiveness.

Waiver of information reporting for PPP loan forgiveness. The COVIDTRA allows IRS to waive information reporting requirements for any amount excluded from income under the exclusion- from-income rule for forgiveness of PPP loans or other specified obligations. Note: IRS had already waived information returns and payee statements for loans that, before enactment of the COVIDTRA, were guaranteed by the Small Business Administration under section 7(a)(36) of the Small Business Act.

Extensions and modifications of earlier payroll tax relief. The TCDTR extends the CARES Act credit, allowed against the employer portion of the Social Security (OASDI) payroll tax or of the Railroad Retirement tax, for qualified wages paid to employees during the COVID-19 crisis. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit rate is increased from 50% to 70% of qualified wages. and qualified wages are increased from $10,000 for the year to $10,000 per quarter. Many other rules are also relaxed. And the TCDTR makes some retroactive clarifications and technical improvements to the credit as initially enacted.

The COVIDTRA extends (1) the credits provided by the Families First Coronavirus Response Act (FFCRA) against the employer portion of OASDI and Railroad Retirement taxes for qualifying sick and family paid leave and (2) the equivalent FFCRA-provided credits for the self-employed against the self-employment tax. Under the extension of the employer credits, wages taken into account are those paid before April 1, 2021 (instead of January 1, 2021). Under the extension of the credits for the self employed, the days taken into account are those before April 1, 2021 (instead of January 1, 2021).

The COVIDTRA also makes retroactive clarifications of (1) the FFCRA paid leave credits that were extended as discussed above, (2) the exclusion of qualifying paid leave in calculating the employer portion of Railroad Retirement taxes and (3) and the increase in the amount of the FFRCA paid leave credits against the employer portion of Railroad Retirement taxes by the amount of the Medicare payroll taxes on qualifying paid leave. Additionally, the COVIDTRA directs IRS to extend the Presidentially ordered deferral of the employee’s share of OASDI and Railroad Retirement taxes. As first provided by IRS, the deferral was of taxes to be withheld and paid on wages and other compensation (up to $4,000 every two weeks) paid in the period from September 1, 2020 to December 31, 2020 so that the taxes were instead withheld and paid ratably in the period from January 1, 2021 to April 30, 2021. Under the deferral, the period over which the deferred-from-2020 taxes are ratably withheld and paid is extended to all of 2021 (instead of the four-month period ending on April 30, 2021).

Employee benefits and deferred compensation. The TCDTR provides that expenses for business-related food and beverages provided by a restaurant are fully deductible if they are paid or incurred in calendar years 2021 or 2022, instead of being subject to the 50% limit that generally applies to business meals. The TCDTR temporarily allows (1) carryovers and relaxed grace period rules for unused flexible spending arrangement (FSA) amounts, whether in a health FSA or a dependent care FSA, (2) the raising of the maximum eligibility age of a dependent under a dependent care FSA from 12 to 13 and (3) prospective changes in election limits set forth by a plan (subject to the applicable limits under the Code).

With a view to layoffs in the current economic climate, the TCDTR relaxes rules that would otherwise cause a partial qualified retirement plan termination if the number of active participants decreases.

Because of market volatility during the COVID-19 pandemic, the COVIDTRA relaxes, if certain conditions are met, the funding standards that, if met, allow a defined benefit pension plan to transfer funds to a retiree health benefits account or retiree life insurance account within the plan. The CARES Act’s relaxed rules for ‘‘coronavirus-related distributions’’ are retroactively amended by the COVIDTRA to additionally provide that a coronavirus-related distribution that is a during-employment withdrawal from a money purchase pension plan meets the distribution requirements of Code Sec. 401(a).

And under a provision of narrow applicability, the TCDTR lowers to 55 years, from the usually applicable 59½ years, the age at which certain employees in the building or construction trades can, though still employed, receive pension plan payments under certain multiple employer plans without affecting the status of trusts that are part of the pension plans as qualified trusts.

Residential real estate depreciation. For tax years beginning after December 31, 2017, the TCDTR assigns a 30-year ADS depreciation period to residential rental property even though it was placed in service before January 1, 2018 (when the 2017 TCJA first applied the more-favorable 30-year period) if the property (1) is held by a real property trade or business electing out of the limitation on business interest deductions and (2) before January 1, 2018 wasn’t subject to the ADS.

Farmers’ net operating losses. The COVIDTRA allows farmers who had in place a two-year net operating loss carryback before the CARES Act to elect to retain that two-year carryback rather than claim the five-year carryback provided in the CARES Act. It also allows farmers who before the CARES Act waived the carryback of a net operating loss, to revoke the waiver.

Low-income housing credit. The TCDTR provides a 4% per year credit floor for buildings that aren’t eligible for the 9% per-year credit floor. (Both floors are alternatives to the calculation under which the per-year credit is generally a percentage, prescribed by IRS, that is intended to result in a credit that, in the aggregate over the 10-year credit period, has a present value of 70% of the qualified basis for certain new buildings and 30% of the qualified basis for certain other buildings.)

Life insurance. The TCDTR changes the interest rate assumptions that determine whether a contract meets the cash value and premium caps for qualifying as a life insurance contract. The change is to designated floating rates from the respective 4% and 6% rates fixed by prior law.

Disaster relief. The TCDTR includes several provisions targeted at ‘‘qualified disaster areas,’’ some of which affect individuals and some which affect businesses as described below. ‘‘Qualified disaster areas’’ are areas for which a major disaster was Presidentially declared during the period beginning on January 1, 2020 and ending February 25, 2021. The incidence period of the disaster must begin after December 27, 2019 but not after December 27, 2020. Excluded are areas for which a major disaster was declared only because of COVID-19.

The relief includes relief for retirement funds that consists of the following: (1) waiver of the 10% early withdrawal penalty for up to $100,000 of certain withdrawals by individuals living in a qualified disaster area and that have suffered economic loss because of the disaster (qualified individuals), (2) a right to re-contribute to a plan distributions that were intended for home purchase but not used because of a qualified disaster, and (3) relaxed plan loan rules for qualified individuals. Changes to plan amendment rules facilitate the relief.

The relief also provides to employers in the harder-hit parts of a qualified disaster area an up-to-$ 2,400-per-employee employee retention credit, subject to coordination with certain other employer tax credits. Generally, tax-exempt organizations can take it as a credit against FICA taxes.

Corporations are provided with relaxed charitable deduction rules for qualified-disaster-related contributions, and individuals are provided with relaxed loss allowance rules for qualified-disaster-related casualties.

The low-income housing credit is modified to allow, subject to various limitations, increases in the state-wide credit ceilings to the extent allocations are made to harder-hit parts of qualified disaster areas.

Excise taxes. The TCDTR makes various excise tax changes for beer, wine and distilled spirits. The TCDTR also provides that the temporary increase in the Black Lung Disability Trust Fund tax won’t apply to coal sales after 2021 (instead of after 2020). And the end of the liability imposed because of the Oil Spill Liability Trust Fund Rate is deferred until after 2025. Additionally, the alternative fuels credit against the diesel and special motor fuels tax is extended.

2020 COVID Relief Bill Provisions Affecting Individual Taxpayers

RECOVERY REBATE/ECONOMIC IMPACT PAYMENT

Direct-to-taxpayer recovery rebate. The Act provides for a refundable recovery rebate credit for 2020 that will paid in advance to eligible individuals, often automatically, early in 2021. (Code Sec. 6428A, as added by COVIDTRA Sec. 272) These payments are in addition to the direct payments/rebates provided for in earlier Federal legislation, the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020), which were called Economic Impact Payments (EIP).

The amount of the rebate is $600 per eligible family member—$600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. Thus, a married couple with two qualifying children will receive $2,400, unless a phase-out applies. The credit is phased out at a rate of $5 per $100 of additional income starting at $150,000 of modified adjusted gross income for marrieds filing jointly and surviving spouses, $112,500 for heads of household, and $75,000 for single taxpayers.

Treasury must make the advance payments based on the information on 2019 tax returns. Eligible taxpayers who claimed their EIPs by providing information through the nonfiler portal on IRS’s website will also receive these additional payments.

Nonresident aliens, persons who qualify as another person’s dependent, and estates or trusts don’t qualify for the rebate. Taxpayers without a Social Security number are likewise ineligible, but if only one spouse on a joint return has a Social Security number, that spouse is eligible for a $600 payment. Children must also have a Social Security number to qualify for the $600-per-child payments.

Taxpayers who receive an advance payment that exceeds the amount of their eligible credit (as later calculated on the 2020 return) will not have to repay any of the payment. If the amount of the credit determined on the taxpayer’s 2020 return exceeds the amount of the advance payment, taxpayers receive the difference as a refundable tax credit.

Advance payments of the rebates are generally not subject to offset for past due federal or state debts, and they are protected from bank garnishment or levy by private creditors or debt collectors.

Pro-taxpayer changes to CARES Act Economic Impact Payment rules. As noted above, the CARES Act provided EIPs.

The Act makes the following changes to the CARES Act EIP:

  • Provides that the $150,000 limit on adjusted gross income before the credit amount starts to phase out, which, under the CARES Act, applied to joint returns, also applies to surviving spouses. (Code Sec, 6428(c)(1), as amended by Act Sec. 273(a)) This change may allow taxpayers who qualify to use the surviving-spouse filing status to claim a larger EIP on their 2020 returns.
  • Makes the requirement to provide IRS with the taxpayer’s identification number identical to the same requirement under the new rebate, described above under “Direct-to-taxpayer recovery rebate.” (Code Sec. 6428(g), as amended by COVIDTRA Sec. 273(a))

DEDUCTIONS

$250 educator expense deduction applies to PPE, other COVID-related supplies. The Act provides that eligible educators (i.e., kindergarten-through-grade-12 teachers, instructors, etc.) can claim the existing $250 above-the-line educator expense deduction for personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 that were bought after March 12, 2020. IRS is directed to issue guidance to that effect by Feb. 28, 2021. (COVIDTRA Sec. 275; Code Sec. 62(a)(2)(D)(ii))

7.5%-of-AGI “floor” on medical expense deductions is made permanent. The Act makes permanent the 7.5%-of-adjusted-gross-income threshold on medical expense deductions, which was to have increased to 10% of adjusted gross income after 2020.

The lower threshold will allow more taxpayers to take the medical expense deduction in 2021 and later years. (Code Sec. 213(a), as amended by Act Sec. 101)

Mortgage insurance premium deduction is extended by one year. The Act extends through 2021 the deduction for qualifying mortgage insurance premiums, which was due to expire at the end of 2020. The deduction is subject to a phase-out based on the taxpayer’s adjusted gross income. (Code Sec. 163(h)(3)(E)(iv)(I), as amended by Act Sec. 133)

Above-the-line charitable contribution deduction is extended through 2021; increased penalty for abuse. For 2020, individuals who don’t itemize deductions can take up to a $300 above-the-line deduction for cash contributions to “qualified charitable organizations.” The Act extends this above-the-line deduction through 2021 and increases the deduction allowed on a joint return to $600 (it remains at $300 for other taxpayers). (Code Sec. 170(p), as added by Act Sec. 212(a)) Taxpayers who overstate their cash contributions when claiming this deduction are subject to a 50% penalty (previously it was 20%). (Code Sec. 6662(l), as added by Act Sec. 212(b))

Extension through 2021 of allowance of charitable contributions up to 100% of an individual’s adjusted gross income. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income. (The usual limit is 60% of adjusted gross income.) The Act extends this rule through 2021. (Code Sec. 170(b)(1)(G), as amended by Act Sec. 213)

EXCLUSIONS FROM INCOME

Exclusion for benefits provided to volunteer firefighters and emergency medical responders made permanent. Emergency workers who are members of a “qualified volunteer emergency response organization” can exclude from gross income certain state or local government payments received and state or local tax relief provided on account of their volunteer services. This exclusion was due to expire at the end of 2020, but the Act made it permanent. (Code Sec. 139B, as amended by Act Sec. 103)

Exclusion for discharge of qualified mortgage debt is extended, but limits on amount of excludable discharge are lowered. Usually, if a lender cancels a debt, such as a mortgage, the borrower must include the discharged amount in gross income. But under an exclusion that was due to expire at the end of 2020, a taxpayer can exclude from gross income up to $2 million ($1 million for married individuals filing separately) of discharge-of-debt income if “qualified principal residence debt” is discharged. The Act extends this exclusion through the end of 2025, but lowers the amount of debt that can be discharged tax-free to $750,000 ($375,000 for married individuals filing separately). (Code Sec. 108(a)(1)(E), as amended by Act Sec. 114(a))

Extension of exclusion for certain employer payments of student loans.  Qualifying educational assistance provided under an employer’s qualified educational assistance program, up to an annual maximum of $5,250, is excluded from the employee’s income. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136, 3/27/2020) added to the types of payments that are eligible for this exclusion, “eligible student loan repayments” made after Mar. 27, 2020, and before Jan. 1, 2021. These payments, which are subject to the overall $5,250 per employee limit for all educational payments, are payments of principal or interest on a qualified student loan by the employer, whether paid to the employee or a lender. The Act extends the exclusion for eligible student loan repayments through the end of 2025. (Code Sec. 127(c)(1)(B), amended by Act Sec. 120)

TAX CREDITS

Individuals may elect to base 2020 refundable child tax credit (CTC) and earned income credit (EIC) on 2019 earned income. If an individual’s child tax credit (CTC) exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of so much of the taxpayer’s taxable “earned income” for the tax year as exceeds $2,500. And the earned income credit (EIC) equals a percentage of the taxpayer’s “earned income.” For both of these credits, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year. But for determining the refundable CTC and the EIC for 2020, the Act allows taxpayers to elect to substitute the earned income for the preceding tax year, if that amount is greater than the taxpayer’s earned income for 2020. (Act Sec. 211(a))

Health coverage tax credit (HCTC) for health insurance costs of certain eligible individuals is extended by one year. A refundable credit (known as the health coverage tax credit or “HCTC”) is allowed for 72.5% of the cost of health insurance premiums paid by certain individuals (i.e., individuals eligible for Trade Adjustment Assistance due to a qualifying job loss, and individuals between 55 and 64 years old whose defined-benefit pension plans were taken over by the Pension Benefit Guaranty Corporation). The HCTC was due to expire at the end of 2020, but the Act extended it through 2021. (Code Sec. 35(b)(1)(B), amended by Act Sec. 134)

New Markets tax credit extended. The New Markets credit provides a substantial tax credit to either individual or corporate taxpayers that invest in low-income communities. This credit was due to expire at the end of 2020, but the Act extended it through the end of 2025. Carryovers of the credit were extended, as well. (Code Sec. 45D(f)(1)(H), amended by Act Sec. 112(a))

Nonbusiness energy property credit extended by one year. A credit is available for purchases of “nonbusiness energy property”—i.e., qualifying energy improvements to a taxpayer’s main home. The Act extends this credit, which was due to expire at the end of 2020, through 2021. (Code Sec. 25C(g)(2), amended by Act Sec. 141)

Qualified fuel cell motor vehicle credit extended by one year. The credit for purchases of new qualified fuel cell motor vehicles, which was due to expire at the end of 2020, was extended by the Act through the end of 2021. (Code Sec. 30B(k)(1), as amended by Act Sec. 142)

2-wheeled plug-in electric vehicle credit extended by one year. The 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500) was extended until the end of 2021 by the Act. (Code Sec. 30D(g)(3)(E)(ii), amended by Act Sec. 144)

Residential energy-efficient property (REEP) credit extended by two years, bio-mass fuel property expenditures included. Individual taxpayers are allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, equal to the applicable percentages of expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property. The REEP credit was due to expire at the end of 2021, with a phase-down of the credit operating during 2020 and 2021. The Act extends the phase-down period of the credit by two years—through the end of 2023; the REEP credit won’t apply after 2023. (Code Sec. 25D(h), as amended by Act Sec. 148(a))

The Act also adds qualified biomass fuel property expenditures to the list of expenditures qualifying for the credit, effective beginning in 2021. (Code Sec. 25D(a), as amended by Act Sec. 148(b)).

DISASTER-RELATED CHANGES IN RETIREMENT PLAN RULES

10% early withdrawal penalty does not apply to qualified disaster distributions from retirement plans. A 10% early withdrawal penalty generally applies to, among other things, a distribution from employer retirement plan to an employee who is under the age of 59½. The Act provides that the 10% early withdrawal penalty doesn’t apply to any “qualified disaster distribution” from an eligible retirement plan. The aggregate amount of distributions received by an individual that may be treated as qualified disaster distributions for any tax year may not exceed the excess (if any) of $100,000, over the aggregate amounts treated as qualified disaster distributions received by that individual for all prior tax years. (TCDTR Sec. 302(a))

Increased limit for plan loans made because of a qualified disaster. Generally, a loan from a retirement plan to a retirement plan participant cannot exceed $50,000. Plan loans over this amount are considered taxable distributions to the participant. The Act increases the allowable amount of a loan from a retirement plan to $100,000 if the loan is made because of a qualified disaster and meets various other requirements. (TCDTR Sec. 302(c)(3))

Deductibility of Business Meals Provided by Restaurants in 2021 and 2022

You’ve probably heard that the recent stimulus legislation included a provision that removes the 50% limit on deducting business meals provided by restaurants in 2021 and 2022 and makes those meals fully deductible. Here are the details.

In general, the ordinary and necessary food and beverage expenses of operating your business are deductible. However, the deduction is limited to 50% of the otherwise allowable expense.

The new legislation adds an exception to the 50% limit for expenses for food or beverages provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022.

The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule isn’t limited to meals eaten on the restaurant’s premises. Takeout and delivery meals provided by a restaurant are also fully deductible.

It’s important to note that, other than lifting the 50% limit for restaurant meals, the legislation doesn’t change the rules for deducting business meals. All the other existing requirements continue to apply. Thus, to be deductible:

  • The food and beverages can’t be lavish or extravagant under the circumstances.
  • You or one of your employees must be present when the food or beverages are served.
  • The food or beverages must be provided to you or to a “business associate.” This is defined as a current or prospective customer, client, supplier, employee, agent, partner, or professional adviser with whom you could reasonably expect to engage or deal in your business.

If food or beverages are provided at an entertainment activity, either they must be purchased separately from the entertainment or their cost must be stated on a separate bill, invoice, or receipt. This is required because the entertainment, unlike the food and beverages, is nondeductible.

IRS Provides Safe Harbor for Deducting Expenses if PPP Loan is Not Forgiven

In a Revenue Procedure, the IRS has provided a safe harbor allowing a taxpayer to claim a deduction in 2020 for certain otherwise deductible eligible expenses if the taxpayer received a Paycheck Protection Program (PPP) loan which (1) at the end of the taxpayer’s 2020 tax year the taxpayer expects to be forgiven in a tax year after the 2020 tax year, and, (2) in a post-2020 tax year, the taxpayer’s request for forgiveness of the loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the loan.

Background. Sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP) as a loan program administered by the U.S. Small Business Administration (SBA) that was designed to assist businesses adversely impacted by the COVID-19 emergency to pay payroll costs and other eligible expenses. Under the PPP, the SBA is permitted to guarantee the full principal amount of a covered loan, defined by Act Sec. 1102(a)(2) as a loan made under the PPP during the covered period; a covered loan may be forgiven under Act Sec. 1106.  The covered period is the period beginning on February 15, 2020, and ending on December 31, 2020.

An individual or entity that is eligible to receive a covered loan (eligible recipient) can receive forgiveness of the full principal amount of the covered loan up to an amount equal to the following costs incurred and payments made during the covered period: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, and (4) any covered utility payment (eligible expenses). (Act Sec. 1106(b))

Under Act Sec. 1106(i), for purposes of the Code, “any amount which (but for [Act Sec. 1106(i)]) would be includible in gross income of the eligible recipient by reason of forgiveness described in [Act Sec. 1106](b) shall be excluded from gross income.” Act Sec. 1106(i) excludes the amount from gross income regardless of whether the amount would be (1) income from the discharge of indebtedness under Code Sec. 61(a)(11), or (2) otherwise includible in gross income under Code Sec. 61.

Rev Rul 2020-27, 2020-50, holds that a taxpayer computing taxable income on the basis of a calendar tax year may not deduct eligible expenses in its 2020 tax year if, at the end of the 2020 tax year, the taxpayer has a reasonable expectation of reimbursement in the form of covered loan forgiveness on the basis of the eligible expenses it paid or accrued during the covered period.

Safe harbor rules. Rev Proc 2020-51, 2020-50 provides two safe harbors to claim deductions for eligible expenses in the 2020 tax year for which no deduction would otherwise be permitted because at the end of the 2020 tax year the taxpayer reasonably expects to receive forgiveness of the covered loan based on those eligible expenses (non-deducted eligible expenses).

Safe harbor for deductions to be claimed in 2020 tax year. An eligible taxpayer (described below) who satisfies the safe harbor requirements (described below) may deduct non-deducted eligible expenses on the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 tax year, or amended return or Administrative Adjustment Request under Code Sec. 6227 for the 2020 tax year, as applicable.

Safe harbor for deductions to be claimed in subsequent tax year. An eligible taxpayer who satisfies the safe harbor requirements, may deduct non-deducted eligible expenses on the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for a subsequent tax year (i.e., a tax year after the 2020 tax year). Eligible taxpayers may, but do not need to, use this safe harbor to deduct non-deducted eligible expenses in a subsequent tax year because those taxpayers may deduct the non-deducted eligible expenses in the year that the loan forgiveness is denied under general tax principles, assuming that the taxpayer does not elect to the use the safe harbor above.

Safe harbor requirements. A taxpayer applying one of the safe harbor procedures may not deduct an amount of non-deducted eligible expenses in excess of the principal amount of the taxpayer’s covered loan for which forgiveness was denied or will no longer be sought.

A taxpayer may not apply the safe harbor procedures to deduct any amount of non-deducted eligible expenses unless the taxpayer attaches a statement to the return on which the taxpayer deducts non-deducted eligible expenses. The statement must be titled “Revenue Procedure 2020-51 Statement.” The Revenue Procedure provides details of what must be included in the statement.

Eligible taxpayer. A taxpayer is eligible to apply either of the safe harbors if the taxpayer meets either of the following two requirements.

A taxpayer meets the first requirement if:

(1) The taxpayer paid or incurred eligible expenses in the 2020 tax year for which no deduction is permitted because at the end of the 2020 tax year the taxpayer reasonably expects to receive forgiveness of the covered loan based on those eligible expenses;

(2) The taxpayer submitted before the end of the 2020 tax year, or as of the end of the 2020 tax year intends to submit in a subsequent tax year, an application for covered loan forgiveness to the lender; and

(3) In a subsequent tax year, the lender notifies the taxpayer that forgiveness of all or part of the covered loan is denied.

A taxpayer meets the second requirement if:

(1) The taxpayer meets the requirements of (1) and (2) above; and

(2) In a subsequent tax year, the taxpayer irrevocably decides not to seek forgiveness for some or all of the covered loan. For example, a taxpayer that determines that it will not qualify for covered loan forgiveness and withdraws the application submitted to the lender as described in Rev Proc 2020-51, Sec. 3.01.

Additional limitations. Nothing in the Revenue Procedure precludes the IRS from examining other issues relating to the claimed deductions for non-deducted eligible expenses, including the amount of the deduction and whether the taxpayer has substantiated the deduction claim. It also does not preclude the IRS from requesting additional information or documentation verifying any amounts described in the statement described in Rev Proc 2020-51, Sec. 4.04.

Effective date. The Revenue Procedure is effective for tax years beginning or ending in 2020.

Final Form 941-X Instructions Detail COVID-19 Changes

The IRS has issued the final instructions for the revised Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. The instructions detail changes to the form to account for the COVID-19 tax relief.

Background. Form 941, Employer’s Quarterly Federal Tax Return, is used by employers to report, on a quarterly basis: a) federal income tax, social security tax, Medicare tax and Additional Medicare tax withheld from employee compensation; and b) the employer’s share of social security and Medicare taxes.

Form 941-X is used by employers to correct errors on a previously filed Form 941.

In response to the COVID-19 health emergency, the Families First Coronavirus Response Act (FFCRA) and Coronavirus, Aid, Relief and Economic Security Act (CARES Act) were signed into law. These bills provide credits for paid sick leave and expanded family and medical leave, the employee retention credit, and a deferral of certain employment taxes. The IRS then revised Form 941 to include line items for reporting the COVID-19 tax credits and the employment tax deferral. The IRS has also issued a new draft version of Form 941-X that reflects the changes made to the latest version of Form 941.

Form 941-X instructions. The IRS has now issued final instructions for the draft version of Form 941-X.

The instructions note that employers can now use Form 941-X to report corrections to the following items reported on Form 941:

  • Amounts for the credit for qualified sick and family leave wages.
  • Amounts for the employee retention credit.
  • The deferred amount of the employer share of social security tax.

New Draft Form 941-X Adds Lines for COVID-19 Tax Credits

The IRS has issued a new draft of Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund). The new draft adds 14 new lines that are based on lines that were added to the recently-issued Form 941 (Employer’s Quarterly Federal Tax Return), to reflect credits that were enacted earlier this year to provide COVID-19 relief.

Background. Form 941 is used by employers to report, on a quarterly basis: a) federal income tax, social security tax, Medicare tax and Additional Medicare tax withheld from employee compensation; and b) the employer’s share of social security and Medicare taxes.

Form 941-X is used by employers to correct errors on a previously filed Form 941.

In response to the COVID-19 health emergency, the Families First Coronavirus Response Act (FFCRA) and Coronavirus, Aid, Relief and Economic Security Act (CARES Act) were signed into law. These bills provide paid sick leave and expanded family and medical leave, the employee retention credit, and a deferral of certain employment taxes.

The IRS then revised Form 941 to include line items for reporting these COVID-19 tax credits. This newly revised Form 941 must be used by employers beginning with the second quarter of 2020.

New Form 941-X. The IRS has now issued a new draft version of Form 941-X that reflects the changes made to the latest version of Form 941. It adds 14 new lines to Part 3 of the form, which is entitled “Enter the corrections for this quarter…” For example, new line 9 is for Qualified sick leave wages (which corresponds to Form 941, Line 5(a)(ii)), and new line 28 is for Qualified health plan expenses allocable to qualified sick leave wages (which corresponds to Form 941, line 19).

The IRS has not yet issued a draft version of the Form 941-X instructions.

The Mailbox Rule in the time of COVID-19

As the July 15 filing deadline approaches, tax returns mailed to the IRS may sit in mail facilities for several days because of COVID-19. But, if a taxpayer follows the Code Sec. 7502 Mailbox Rule, a return will be treated as filed on the date of the postmark and, hence, the taxpayer has no need to worry about the timeliness of filing, if the IRS does not log in the return until several days, or even weeks, after timely mailing.

Background. The IRS has announced that the automatically postponed tax deadline of July 15, 2020, which was granted as COVID-19 relief, will not be further postponed.  The National Taxpayer Advocate has recently identified the uncertainty about when the IRS will be able to open and log all tax returns sitting in mail facilities as one of the adverse impacts to taxpayers caused by COVID-19. And the IRS admits that it is experiencing delays in processing paper tax returns due to limited staffing. The IRS will process paper returns in the order they received them. This delay may result in more utilization of the “Mailbox Rule” than normal. Below is a summary of some key provisions and requirements of the rule.

The Mailbox rule, in summary. Generally, the Code provides that a tax return, claim, statement, other required document, or payment (Tax Document) is deemed to be filed or made on the date of the postmark. This rule applies whether the taxpayer uses the US Postal Service (USPS) or a designated private delivery service (PDS)

If a taxpayer uses a non-designated PDS, making the Mailbox Rule unavailable, then, in order for the Tax Document to be timely, it must be received by the IRS on or before the due date. When a taxpayer does not satisfy the requirements of the Mailbox Rule, a Tax Document is considered filed on the date it is received by the IRS.

Delivery requirement. If a Tax Document is sent as first class mail via the USPS (that is, sent via the USPS but not as registered or certified mail), the taxpayer has the burden of proof to show, in addition to a timely postmark, that the Tax Document was actually delivered to the IRS.

However, that burden does not apply if the Tax Document is sent by certain enhanced mailing services.  A Tax Document (excluding a payment) sent by US registered mail, US certified mail, or by a designated PDS will be prima facie evidence that the document was delivered.

Mailing requirements. To qualify for the Mailbox Rule, a Tax Document must comply with certain mechanical rules regarding:

  • the envelope and address;
  • timely deposit in the U.S. mail; and
  • the postmark.

Envelope and address.  A Tax Document must be contained in an envelope and be properly addressed to the agency, officer, or office with which the Tax Document is required to be filed or made.

For an individual tax return, the proper address can be found in the Instructions for Form 1040 and Form 1040-SR (U.S. Individual Income Tax Return), p. 108, or at Where to File Paper Returns With or Without a Payment.

Timely deposit. A Tax Document must be deposited by the due date in the mail in the U.S. with sufficient postage prepaid. For this purpose, a Tax Document is deposited in the mail when it is deposited with the domestic mail service of the USPS. The Mailbox Rule does not apply to any Tax Document that is deposited with the mail service of any other country.

Postmark—USPS. If the postmark on the envelope of a Tax Document is made by the USPS, then the postmark must bear a date on or before the applicable due date.

If the postmark does not bear a date on or before the due date, then a Tax Document is considered not to be timely filed or paid, regardless of when the Tax Document is deposited in the mail. Thus, a sender who intends to rely on the applicability of the Mailbox Rule assumes the risk that the postmark will end up being an untimely date.

If a Tax Document is sent by U.S. registered mail, the date of registration is treated as the postmark date. If a Tax Document is sent by U.S. certified mail, and the sender’s receipt is postmarked by the USPS, the date of the postmark on the receipt is treated as the postmark date.

Postmark—PDS.  For each designated PDS, the delivery service records electronically the date on which an item was given to it for delivery, which is treated as the postmark date for purposes of Code Sec. 7502.

But Notice 2016-30 provides that the postmark date for a Tax Document delivered after the due date is presumed to be the day that precedes the delivery date by an amount of time that equals the amount of time it would normally take for an item to be delivered under the terms of the specific type of delivery service used (e.g., two days before the actual delivery date for a two-day delivery service).

Taxpayers who wish to overcome the presumption in the Notice must provide information that shows that the date recorded in the delivery service’s electronic database is on or before the due date, such as a written confirmation produced and issued by the delivery service.

Example. A uses UPS 2nd Day Air to send his tax return to the IRS. The filing is due July 15. The return is delivered to the IRS on July 18. The postmark date for A’s return is presumed to be July 16, two days before the actual delivery date for two-day service. To overcome this presumption and establish that the return was timely, A must show that the date recorded in UPS’s electronic data base is on or before July 15.

Postmark—USPS and non-USPS. If a Tax Document has both USPS and non-USPS postmarks, then the non-USPS postmark is disregarded.

Rules for payments. For a payment to qualify for the Mailbox Rule, whether made in the form of currency or other medium of payment, it must actually be “received and accounted for.” For example, if a check is used as the form of payment, the Mailbox Rule does not apply unless the check is honored upon presentation.

Rules for credit or refund claim. When a return also constitutes a claim for credit or refund, the Mailbox Rule is applicable to the determination of whether the claim was timely filed.

Electronically filed document rules. Separate timely submission rules apply to the use of electronic return transmitters and electronic postmarks. A Tax Document filed electronically with an electronic return transmitter is deemed to be filed on the date of the electronic postmark given by the authorized electronic return transmitter. Thus, if the electronic postmark is timely, the Tax Document is considered filed timely although it is received by the IRS after the last date, or the last day of the period, prescribed for filing such Tax Document.

An electronic postmark is a record of the date and time (in a particular time zone) that an authorized electronic return transmitter receives the transmission of a taxpayer’s electronically filed document on its host system.

IRS won’t postpone July 15 filing, payment deadline

In an Information Release, the IRS has announced that the July 15 tax filing and payment deadline won’t be postponed. Individuals unable to meet the July 15 filing deadline can request an automatic extension, until October 15, to file. However, tax payments are due on July 15.

Background. Due to the COVID-19 pandemic, the April 15 filing and tax payment due date for 2019 was postponed to July 15.  Previously, the Treasury Secretary indicated that the July 15 deadline might be postponed.

July 15 deadline won’t be postponed. The IRS has announced that the July 15 filing and payment deadline won’t be postponed. Individuals unable to meet the July 15 filing deadline can request an automatic extension of time to file. However, tax payments are due on July 15.

Automatic extensions of time to file a return. Taxpayers who need more time to file their federal income tax return can get an extension until October 15 by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, before the July 15 deadline. Taxpayers should estimate their tax liability on Form 4868 and pay any amount due when filing the form.

Taxpayers can also get an automatic extension by making a tax payment using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or an authorized credit or debit card processor, and indicating that the payment is for an automatic extension.

When using one of the above payment methods to request an automatic extension, taxpayers do not have to file a Form 4868 and will receive a confirmation of their payment for their records.

State filing deadlines. The IRS also reminds taxpayers to check their state filing and payment deadlines, which may differ from the federal July 15 deadline. A list of state tax division websites is available through the Federation of Tax Administrators.

President signs bill that provides more PPP flexibility

On June 5, President Trump signed he Paycheck Protection Program (PPP) Flexibility Act (PPPFA) of 2020 (H.R. 7010) which provides more flexibility for participants in the PPP program, including allowing those participants to defer the payment of certain payroll taxes that the CARES Act prevented them from deferring.

Background. The PPP is a provision included in the CARES Act (P.L. 116-136, the Act) that authorizes a certain amount of forgivable loans to small businesses to pay their employees during the COVID-19 pandemic.

The CARES Act contains a provision, Act Sec. 2302, that defers the payment of 50% of certain payroll taxes until Dec. 31, 2021 and defers payment of the remaining 50% until Dec. 31, 2022. The Act provides an exception to the above rule; under that exception, these deferrals don’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 (PPP loans), or indebtedness forgiven under Act Sec. 1109.

New law provides tax deferral relief. PPPFA eliminates the above exception and thus would allow taxpayers with these forgiven loans to defer payment of the payroll taxes.

Non-tax provisions in new law. The following are among the non-tax provisions in the new law:

•In the original CARES Act, PPP loans were forgiven if a business spent 75% of the loan money on payroll. PPPFA lowers that to 60%.

•PPPFA allows businesses 24 weeks, instead of the 8 weeks contained in the original CARES Act, to use the loan money. PPPFA also does not require businesses to wait for 24 weeks to apply for forgiveness; they can still do so after eight weeks if they prefer.

•PPPFA pushes back a June 30 deadline to rehire workers to December 31, 2020.

•The CARES Act required a business to rehire the same number of full-time employees or full-time equivalents by June 30, 2020. It provided one exception to that requirement. PPPFA provides additional exceptions if an employer is unable to rehire the required number of employees. For example, there is an exception if the employer Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020

•For any PPP loan that is not forgiven, a business will have five years to repay the loan.