Federal Tax Update – March 2020
P.L. 116-136, the Coronaviris Aid, Relief and Economic Security (CARES) Act:
● Creates a credit against 2020 taxes in the form of a rebate for U.S. residents with social security numbers and not a dependent of another based on 2019 adjusted gross income (or 2018 if 2019 is unfiled) of $1,200 ($2,400 if married) plus an additional $500 per qualifying child with the maximum rebate phased out by $5 for each $100 that income exceeds $75,000 for single individuals, $112,500 for heads of household and $150,000 for married couples; the credit amount is subsequently computed on the 2020 return and the rebate is subtracted but not below zero.
● Allows a deduction of up to $300 for cash charitable donations in 2020 to nonitemizers and suspends the adjusted gross income cap on cash contributions for 2020.
● Creates an exclusion after date of enactment through year-end on employer repayment of student loans up to $5,250 as part of the existing employee educational assistance program.
RETIREMENT AND ESTATE PLANNING
P.L. 116-136, the Coronavirus Aid, Relief and Economic Security (CARES) Act:
● Suspends the minimum distribution rule for 2020 (and for 2019 first time required minimum distributions within the grace period ending April 1, 2020) for defined contribution plans and IRAs, ignoring 2020 in determining any five-year period on required withdrawals (any ten-year period, in contrast, is not extended).
● Waives the 10 percent early withdrawal penalty for distributions in 2020 up to $100,000 from qualified retirement plans or IRAs with one-third taxed in each of three years beginning in 2020 and recontribution available within three years for individuals (including self-employeds) diagnosed or with a spouse or dependent diagnosed with the virus or with an inability to work due to quarantine, furlough, closing or reduced hours.
● Allows cumulative loans from employer plans from date of enactment through September 22, 2020 of up to the lesser of $100,000 or 100 percent of an individual’s vested balance and delays repayment on existing loans by one year on payments due on or after the date of enactment through December 31, 2020, in each case for individuals (including self-employeds) diagnosed or with a spouse or dependent diagnosed with the virus or with an inability to work due to quarantine, furlough, closing or reduced hours.
In Conard v. Commissioner, 154 TC No. 6, the Tax Court ruled that the penalty for early withdrawal for those not disabled and under age 59½ does not violate equal protection as the law promotes a legitimate state purpose.
In a FAQ on the IRS website, IRS indicated that the deadline for making IRA contributions and for calendar year corporations to make retirement contributions (without an extension) is July 15, 2020 rather than April 15.
P.L. 116-127, The Families First Coronavirus Response Act, creates a 100 percent tax credit against the employer portion of social security tax when employers of less than 500 employees provide paid leave from April 1, 2020 under the Act due to quarantine, seeking medical diagnosis or care for another; the cap is generally 100 percent of pay up to $511 per day for ten days but is two-thirds of pay up to a $200 payment per day for ten days for care of another but up to 60 days if the care is because of school or day care closing due to the virus (a credit against income tax is available to those self-employed).
P.L. 116-136, the Coronavirus Aid, Relief and Economic Security (CARES) Act:
● Provides a refundable employment tax credit for 50 percent of the first $10,000 of wages (including health insurance) per employee paid or incurred from March 13, 2020 for any quarter through yearend for employers fully or partially shut down by a governmental authority due to the virus or whose quarterly gross receipts declined by more than 50 percent from the comparable quarter in 2019 ceasing at the start of a quarter where the 80 percent level is attained (not available to businesses relieved of certain loan indebtedness pursuant to the Act); for business of more than 100 employees, the credit applies only when employees were not providing services due to the virus.
● Allows a deferral of payment of the employer portion of social security taxes (one-half by self-employeds) after enactment and through 2020, one-half to December 31, 2021 and the balance to December 31, 2022.
● Relaxes the business interest limitation for 2019 and 2020 by allowing a deduction up to the amount of interest income plus 50 percent of income before depreciation and amortization and by allowing 2019 income numbers to be utilized in 2020 for calculating this limitation.
● Allows net operating losses from 2018, 2019 and 2020 to be carried back five years and to fully offset income.
● Delays the applicability of the ordinary loss limitation for individuals retroactive to 2018 with a new effective date of 2021 (2027 in the case of farmers).
● Allows C corporations in 2020 to deduct cash charitable contributions of up to 25 percent of tentative taxable income.
● Allows an election until December 31, 2020 by C corporations to take any unused alternative minimum tax credit on a 2018 return; otherwise it is taken in 2019.
● Corrects an error in the 2017 Tax Cuts and Jobs Act by restoring the treatment of leasehold improvements to commercial property by landlords or tenants as 15-year property, allowing immediate writeoff through bonus depreciation.
In Brown v. Commissioner, 125 AFTR2d 2020-________, the Eleventh Circuit Court of Appeals agreed with the Tax Court that a CPA working as a consultant mostly in New Jersey but with his family in Georgia had a tax home in New Jersey; the taxpayer only offered vague testimony about some work performed in Georgia.
In United States v. Schwarzbaum, 125 AFTR2d 2020-________, a Florida Federal District Court found that a taxpayer’s failure to file an FBAR for the first year in which he had funds in a foreign bank account, all of which was gifts from his father, was not willful, rejecting an argument by the Government that simply signing an income tax return does not automatically create willfulness; having filed an FBAR in the following year, the failure to file succeeding years was considered willful.
In United States v. Holland, 125 AFTR2d 2020-1195, the Sixth Circuit Court of Appeals agreed with a Michigan Federal District Court that the IRS could not seize about $20 million of assets in a partnership created by the tax debtor, a top Motown song writer; IRS had argued that a partnership created 14 years previous was the alter ego of the individual, the Court disagreeing and finding that there was full consideration for the prior transfer.
In In Re: Albracht, 125 AFTR2d 2020-________, a North Carolina Bankruptcy Court concluded that the shared responsibility payment is a penalty and not a tax, making the IRS only an unsecured creditor against the debtor; the Courts are deeply divided.
In Maehr v. US Department of State, 125 AFTR2d 2020-1093, a Colorado Federal District Court determined that the revocation of a passport for substantial delinquent taxes is not unconstitutional because it rationally relates to a legitimate government interest.
In Notices 2020-17, 2020-18 and 2020-20, IRS extended April 15 filing and payment deadlines for individuals, corporations, partnerships, and fiduciaries as well as gift tax returns to July 15, 2020 including estimated taxes which otherwise would have been due on April 15.
In News Release 2020-59, IRS suspended installment agreement payments and monthly Offer in Compromise payments due between April 1, 2020 and at least July 15, 2020 with interest continuing to accrue; it also suspended new passport certifications, referrals to private debt collectors, most liens and levies and most audits during this period.