Tax Changes That Matter to You and Your Employees

| March 23, 2020

By: Christine Weingart

New Tax Day

On Friday, March 20, the IRS released Notice 2020-18, providing that the April 15 due date to file Federal income tax returns and pay the related income tax is automatically extended until July 15, 2020.  Earlier last week, the IRS issued Notice 2020-17 which deferred the due date to pay Federal income tax of up to $1 million for individuals and $10 million for corporations until July 15, 2020, but did not extend the April 15 return filing due date.  Notice 2020-18 expressly supersedes Notice 2020-17 by extending the return filing due date and removing the cap on the amount of income tax that may be deferred.

Notice 2020-18 also extends the due date to pay federal estimated income tax payments for the first quarter of 2020 until July 15, 2020.  This relief applies to all taxpayers, including individuals, trusts, estates, partnerships, associations, companies and corporations.  The relief only applies to Federal income tax returns and Federal income taxes.  No deferral is granted for other taxes and related returns, such as Federal gift taxes, or for information returns.

Credit Related to the Families First Coronavirus Response Act

The Families First Coronavirus Response Act gives all U.S. businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The legislation aims to help employers keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus. The guidance from the IRS provides:

  • Complete Coverage: Employers will receive 100% reimbursement for paid leave pursuant to the Act
    • Health insurance costs are also included in the credit
    • Employers face no payroll tax liability
    • Self-employed individuals receive an equivalent credit
  • Fast Funds: Reimbursement will be quick and easy to obtain
    • An immediate dollar-for-dollar tax offset against payroll taxes will be provided
    • Where a refund is owed, the IRS will send the refund as quickly as possible
  • Small Business Protection: Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Disaster Payments to Employees

The Federal government designated the Coronavirus as a disaster on March 13, 2020. As a result of this designation, Section 139 of the Code permits tax-free reimbursements by employers as a “Qualified Disaster Payment.” In addition to being tax-free to the employees receiving such payments, the employer’s payments are fully deductible under Section 139.

Section 139 provides that gross income does not include any amount received by an individual as a “Qualified Disaster Payment.” This includes payments by an employer, not otherwise reimbursed by insurance, to its employees, which are reasonably expected by the employer to:

  • reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
  • reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

No regulations have been issued to provide guidance on exactly which expenses and under what circumstances reimbursement or payments may occur. Wage replacement such as paid sick leave would not be covered by Section 139 and would remain taxable to the employee recipient.  However, other than actual payment for lost wages, the employer can reimburse, or provide in-kind, benefits reasonably believed by the employer to result from the Coronavirus that are not covered by insurance. Such expenses might include:

  • Medical expenses
  • Health-related expenses that are not medical expenses, such as over-the-counter medications, hand sanitizers
  • Child care or tutoring expenses due to school closings
  • Increased home expenses due to telecommuting, e.g. home office set-up, internet, printer, cell phone, increased utility expenses

Although not required, if you wish to take advantage of Section 139, we recommend a formal plan be adopted. The following features may be considered as part of the plan:

  • State that the plan is with respect to the coronavirus disaster
  • Describe eligible employee class or group
  • List expenses that will be reimbursed, or provide per-employee allowance for presumed reasonable expenses
  • Describe the method for reimbursement/payment, e.g. whether application is necessary
  • Provide any employer-imposed expense limit per employee (no limit applies per the statute)
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