To help address the specific Tax guidelines in response to COVID-19, Baker Botts has compiled an extensive Resource Guide. Details include the latest information on the following topics:
- Federal Income Tax
- State and Local Tax (SALT)
- Executive Compensation and Employee Benefits
IRS Extends More Key Deadlines in Response to COVID-19
On April 9, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-23, which extends key deadlines for nearly all taxpayers that have a filing or payment obligation falling on or after April 1, 2020, and before July 15, 2020. The full press release is available at IRS News Release IR-2020-66.
Notice 2020-23 expands on prior relief announced last month in Notices 2020-18 and 2020-20, in which the IRS extended the deadline for filings and payments of federal income taxes and federal gift (and generation skipping transfer) taxes to July 15, 2020. The IRS had also recently announced the People First Initiative (discussed by us here), which provides deadline extensions and other relief to taxpayers under audit or subject to enforced collection actions.
Noteworthy provisions in Notice 2020-23 include the following:
- July 15, 2020 Extension for Tax Filings and Payments. Taxpayers have until July 15, 2020 to meet filing and payment obligations for a wide variety of taxes. This extension specifically applies with respect to “all schedules” and “other forms that are filed as attachments” to the tax returns, including for example Schedule H and Schedule SE and Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938.
- July 15, 2020 Extension for Petitions, Claims, and Suits. Taxpayers have until July 15, 2020 to perform all “Specified Time-Sensitive Actions,” which include:
i. filing all petitions with the Tax Court,
ii. filing a claim for credit or refund of any tax, and
iii. bringing suit upon a claim for credit or refund of any tax.
Notice 2020-23 does not provide relief for the time period for filing a petition with the Tax Court, or for filing a claim or bringing a suit for credit or refund, if that period expired before April 1, 2020.
- 30-Day Extension for IRS Employees. IRS employees have an additional 30 days to perform all “Time-Sensitive IRS Actions,” including:
i. assessing any tax,
ii. giving or making any notice or demand for the payment of any tax,
iii. collecting the amount of any liability in respect of any tax,
iv. bringing suit in respect of any liability in respect of tax, and
v. allowing a credit or refund of any tax.
This 30-day extension applies to certain taxpayers when these deadlines fall on or after April 6, 2020 and before July 15, 2020.
The relief under Notice 2020-23 is automatic. Taxpayers do not need to call the IRS or file any extension forms, or send letters or other documents to receive this relief. Also, it does not appear that an IRS employee must notify the taxpayer if the IRS employee takes advantage of the 30-day extension on certain actions offered under Notice 2020-23.
IRS Clarifies the Interaction of Payroll Tax Deferral Relief with Loan Forgiveness Under the Payroll Protection Program
The IRS recently released frequently asked questions (FAQs) with respect to the ability for employers to defer the deposit and payment of the employer’s share of social security taxes pursuant to the Coronavirus, Aid, Relief and Economic Security (CARES) Act, which FAQs can be located here. In the FAQs, among other questions and answers with respect to the payroll tax deferral, the IRS addresses and provides taxpayer favorable clarification on the interaction of the payroll tax deferral with respect to loans that are forgiven under the Payroll Protection Program (PPP).
Payroll Tax Deferral Background
As background, the CARES Act provides employers with the ability to defer paying the employer’s share of social security taxes required to be paid for the period beginning on March 27, 2020 and ending on December 31, 2020. Such deferred social security taxes are required to be paid over the next two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022. However, importantly, the CARES Act provides that employers who have PPP loans forgiven do not qualify for this deferral.
As employers began to closely examine the details of this payroll tax deferral and the PPP, employers realized that the PPP loan forgiveness exception to this payroll tax deferral presented a potential timing problem because an employer likely would not know until after several of its normal employer payroll deposit periods have passed if the employer would actually receive a PPP loan and then if the PPP loan is actually forgiven. This potential timing problem raised the question of potential penalty exposure for employers if an employer were to take advantage of such deferral and then find out later that it received forgiveness of a PPP loan. The IRS addresses and provides clarification with respect to this timing issue in FAQ #4.
FAQ #4: Clarification on Interaction of Payroll Tax Deferral and PPP Loan Forgiveness
In FAQ #4, the IRS provides that employers may defer (without penalties) the deposit and payment of the employer's share of social security taxes that otherwise would be required to be made beginning on March 27, 2020, through the date that the lender issues a decision to forgive the loan. Once a decision is received that a PPP loan is forgiven, the employer is no longer eligible for the deferral with respect to the employer’s share of social security taxes due after such date. Notwithstanding that the employer will no longer qualify for social security taxes due after such decision date, the employer still qualifies for the deferral with respect to the amount of the employer’s share of social security taxes that were deferred through the date that the PPP loan is forgiven, which means that half of such deferred amounts will be due on December 31, 2021 and the other half on December 31, 2022.
CARES Act Key Tax Relief Provisions
The Coronavirus Aid, Relief and Economic Security (CARES) Act has been approved by both houses of Congress and is expected to be signed into law this afternoon. The CARES Act includes several different tax incentives intended to help workers, families and businesses absorb some of the financial impact of the coronavirus. Some of the key tax incentives include the following:
Modifications of Limitation on Utilization of Net Operating Losses. The 2017 Tax Cuts and Jobs Act (“TCJA”) narrowed a taxpayer’s ability to utilize net operating losses by (a) eliminating the carryback of such NOLs to reduce taxable income in prior tax years and (b) permitting carryforwards of NOLs generated in tax years beginning after December 31, 2017 to offset only up to 80% of the taxpayer’s taxable income. The CARES Act relaxes these limitations by providing that an NOL of a taxpayer (other than a REIT) arising in a tax year beginning in 2018, 2019 or 2020 can be carried back five years. Since carrybacks are made to the earliest of the tax years first, this potentially allows a taxpayer to “recoup” taxes paid at a 35% federal income tax rate during 2015-2017, notwithstanding the fact that the current corporate rate is only 21%. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income for taxable years beginning before January 1, 2021. The CARES Act also extends for 120 days after enactment the ability of a taxpayer to apply for a so-called “quickie” refund, or make or revoke an election not to carryback NOLs.
Modification of Corporate AMT Credit. The corporate alternative minimum tax (AMT) was repealed as part of the TCJA, and any unused corporate AMT credits were made available as refundable credits over a period of several years, ending in 2021. The CARES Act accelerates the ability of corporations to recover those AMT credits, allowing half of the credit in the tax year beginning in 2018 and the remainder in the tax year beginning in 2019. Alternatively, a corporation may elect to claim the entire credit in its tax year beginning in 2018. A corporation that makes this election may apply before December 31, 2020 for a so-called “quickie” refund. In such a case, the IRS is required, within 90 days after the claim is filed, to review the claim, determine the amount of overpayment, and credit or refund the overpayment to the corporation.
Modification of Limitation on Deductibility of Business Interest. The TCJA generally limited the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income for the taxable year. The CARES Act increases the amount of business interest expense which taxpayers are allowed to deduct on their tax returns, by increasing the 30% limitation to 50% of adjusted taxable income for any tax years beginning in 2019 (for taxpayers other than partnerships) or 2020 (for all taxpayers, including partnerships). Taxpayers may, if desired, elect not to have this increased limitation apply. The CARES Act also provides that, in determining the interest deductibility limitation for tax years beginning in 2020, a taxpayer may elect to utilize the amount of the taxpayer’s adjusted taxable income generated in the taxpayer’s tax year beginning in 2019.
In the case of business interest incurred by a partnership, the TCJA’s interest deductibility limitation rules generally apply at the partnership level, interest whose deductibility is limited at the partnership level (“excess business interest”) is passed through to the partners of the partnership, and such interest may not be deducted by any such partner unless and until the partnership has excess business income allocable to such partner in subsequent tax years. The CARES Act specifies that, in the case of a partnership for its tax year beginning in 2019, (a) the 30% (rather than 50%) limitation applies to the partnership, but (b) the partner is permitted to treat 50% of the excess business interest allocated to such partner by the partnership for 2019 as business interest which is actually paid by such partner during its first tax year beginning in 2020 and is not subject to either the 30% or 50% limitation.
Employee Retention Credit For Employers Subject To Closure or Significant Decline in Revenue Due To COVID-19. The CARES Act provides a refundable payroll tax credit for 50% of “qualified wages” paid by any “eligible” employer to employees during the COVID-19 crisis. The credit may be claimed against the employer’s share of all Social Security taxes owed by the employer (as reduced by credits against such taxes for qualified sick leave and family leave claimed under applicable provisions of the Family First Coronavirus Relief Act (“FFCRA”)). The employer may obtain a refund to the extent the credits exceed the employer’s social security tax obligations.
An employer generally is treated as an “eligible employer” (i) during any calendar quarter for which the employer’s operations were fully or partially suspended due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19 or (ii) beginning with the first calendar quarter after December 31, 2019 for which the employer’s gross receipts are less than 50 percent of the employer’s gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter following the first calendar quarter for which the employer’s gross receipts are greater than 80 percent of the employer’s gross receipts for the same quarter in the prior year. For eligible employers with greater than 100 full-time employees during 2019, “qualified wages” generally include wages paid to employees during period in which they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees during 2019, all employee wages generally qualify for the credit, regardless of whether the wages are paid to an employee who is providing services during the period of the COVID-19 related circumstances described above. There are several limitations, however.
- The credit is limited to the first $10,000 of compensation, including health benefits, paid to any eligible employee for all quarters.
- For employers with 100 or fewer employees, no credit is allowed for wages taken into account under the family leave and sick leave provisions of the FFCRA.
- For employers with more than 100 employees, the maximum amount of wages taken into account with respect to an employee during a period in which the employee is not providing services due to the COVID-19-related circumstances described above may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
- No credit is allowed to employer’s who receive small business interruption loans under Section 7(a)(36) of the Small Business Act.
- The credit is not allowed for wages paid to any employee for whom the employer is claiming the work opportunity credit.
For purposes of applying the foregoing rules, all persons treated as a single employer under IRC Sections 52(a), 52(b), 414(m) or 414(o) are treated as a single employer. The credit is available for wages paid or incurred from March 13, 2020 through December 31, 2020.
Deferral of Payment of Employer Payroll Taxes. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages, up to a specified wage cap ($137,700 of wages for 2020). Self-employed persons are subject to a corresponding Social Security component of self-employment tax. The CARES Act generally allows employers to defer payment of the employer’s share of Social Security tax which the employer otherwise is required to pay after March 27, 2020 and before January 1, 2021 and, instead, pay such deferred social security tax (without interest or penalty) over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. A similar deferral applies to 50% of the social security portion of the self-employment tax otherwise required to be paid by self-employed individuals after March 27, 2020 and before January 1, 2021. The foregoing deferrals do not apply, however, to taxpayers who have indebtedness forgiven under certain other provisions of the CARES Act.
Modification of limitation on losses for taxpayers other than corporations. The TCJA added limitations on the ability of a taxpayer other than a corporation to utilize net losses from trades or businesses to offset other taxable income and gains of the taxpayer. In particular, such provision prevents taxpayers other than corporations from deducting “excess business losses” in taxable years beginning after December 31, 2017 and before January 1, 2026. The CARES Act relaxes this limitation so that it does not apply to tax years beginning before January 1, 2021. Losses allowed for tax years beginning in 2018, 2019 or 2020 as a result of this change are added to the taxpayer’s NOLs which can then be carried back under the changes made to the NOL rules by the CARES Act (described above).
Modification of limitations on charitable contributions during 2020. Deductions for charitable contributions of cash by (a) corporations generally are limited to 10% of the corporation’s taxable income before taking into account the charitable contribution deduction and (b) individuals generally are limited to 50% (60% for taxable years beginning after 2017 and before 2026) of the individual’s adjusted gross income. The CARES Act increases the limitations on deductions for “qualified” charitable contributions by individuals who itemize their deductions, as well as corporations. For individuals, the 50% or 60% of adjusted gross income limitation is increased to 100% for “qualified” charitable contributions made in 2020. For corporations, the 10% limitation is increased to 25% of taxable income for “qualified” charitable contributions made in 2020. “Qualified” charitable contributions include contributions of cash during 2020 to public charities and private operating foundations described in IRC Section 170(b)(1)(A) other than contributions to supporting organizations or donor advised funds. The CARES Act also increases the limitation on deductions for contributions of food inventory from a trade or business during 2020 from 15% to 25% of the net income from the trade or business.
Bonus Depreciation Eligibility for Qualified Improvement Property. The CARES Act contains a technical correction to the TCJA by classifying “qualified improvements” made to the interior of a building by a taxpayer (e.g., tenant improvements made by a landlord) as 15-year MACRS property, rather than 39-year property. This, in turn, allows such property to qualify for bonus depreciation (which, among other things, requires that the property have a class life of 20 years or less) and, thus, the cost of same can be written off immediately. The amendment is effective as if included in the TCJA and, thus, taxpayers can, if desired, file amended returns to claim this benefit for 2018 or 2019.
IRS Suspends New Tax Audits and Some Collection Efforts Under New “People First Initiative” in Response to COVID-19
On March 25, 2020, IRS announced a new People First Initiative in an effort to help people facing challenges regarding the COVID-19 pandemic. The full press release is available at IRS News Release IR-2020-59.
The People First Initiative is expected to begin April 1, 2020 and continue through July 15, 2020. During this period, the IRS will take a number of key actions, including:
- New Audits. The IRS will generally not start new examinations, unless (i) the IRS deems it necessary to preserve the applicable statute of limitations or (ii) the taxpayer desires to begin an examination (e.g., while records are still available).
- Existing Audits. The IRS will continue on schedule its existing examinations, except that all in-person meetings will be suspended. Similarly, all cases before the Independent Office of Appeals will continue on schedule, although remotely.
- Refund Claims. The IRS will continue to process refund claims where possible, without in-person contact. The time to receive a refund is limited by statute. Taxpayers who have not filed tax returns during the last three years may still file such returns and claim their refunds.
- IRS Collection.
- Installment Agreements. The IRS will suspend all Installment Agreement payments due between April 1 and July 15, 2020, although interest will continue to accrue by law. Also, the IRS will not default any Installment Agreements during this period.
- Offers in Compromise. The IRS will suspend all Offer in Compromise payments due between April 1 and July 15, 2020, although interest will continue to accrue by law. Also, the IRS will not default any Offer in Compromise during this period for those taxpayers who are delinquent in filing their tax return for tax year 2018, provided however that such 2018 returns (and 2019 returns) are filed on or before July 15, 2020. For those taxpayers with pending OIC requests, the IRS will allow taxpayers until July 15, 2020 to provide requested additional information and will not close any pending OIC request before such time without the taxpayer’s consent.
- Liens and Levies. The IRS will suspend all new automatic, systemic liens and levies through July 15, 2020. Also, liens and levies (including any seizures of a personal residence) initiated by field revenue officers will be suspended through July 15, 2020, although field revenue officers will continue to pursue high-income non-filers and perform other similar activities.
In our experience, the IRS has shown so far that it is well equipped to work remotely, and taxpayers should not expect a delay in their existing examinations as a result of the COVID-19 pandemic. The IRS is encouraging taxpayers to continue responding to requests for information during this period, if they are able to do so.
The IRS will continue to review and, where appropriate, modify or expand the People First Initiative as it continues to review its programs and receive feedback from others.
Families First Coronavirus Response Act (H.R. 6201)
The U.S. Senate approved the Families First Coronavirus Response Act on March 17, 2020, and the bill was signed into law by President Trump on March 18, 2020. The law will be effective in 15 days on April 2, 2020.
Employer Tax Credits for Wages Paid under Sick Leave and Family Leave Provisions. The FFCRA includes provisions generally requiring employers with fewer than 500 employees to provide short-term paid sick leave and longer-term paid family leave to employees while away from work due to COVID-19-related events. A detailed discussion of these provisions can be found here. In order to provide financial assistance to employers, the FFCRA provides a refundable tax credit for qualified wages paid by employers with fewer than 500 employees. The tax credit is allowed against the employer’s portion of Social Security tax (up to a specified cap). If the credit exceeds the employer’s total Social Security tax liability for all employees for any calendar quarter, the excess credit is refundable to the employer. The amount of the tax credits is determined as follows:
- Credit for Qualified Sick Leave Wages. For sick leave paid to an employee under the Emergency Paid Sick Leave Act (“EPSLA”), an employer receives a federal income tax credit for wages paid to the employee during the first 10 days of the employee’s entitlement to paid sick leave under the EPSLA. The tax credit is limited to $511 per day (or $200 per day in cases where the employee utilizes the paid sick time off to care for others or due to school closures).
- Credit for Qualified Family Leave Wages. For leave paid to an employee under the Emergency Family and Medical Leave Expansion Act (“EFMLEA”), an employer receives a federal income tax credit for wages paid to the employee during the full term of an employee’s additional leave up to the 12 weeks permitted under the EFMLEA. The tax credit is limited to $200 per day and $10,000 in the aggregate for each employee.
In cases where the employer maintains a qualified group health plan, an additional credit is available for the portion of the employer’s qualified health plan expenses as are properly allocable to sick leave paid under the EPSLA.
In the case of self-employed individuals, the FFCRA provides refundable credits similar to those discussed under “Credit for Qualified Sick Leave Wages” and “Credit Qualified Family Leave Wages” above against a portion of the self-employment tax. In order to qualify for such credit, the self-employed individual must be a person who would be entitled to receive paid leave under the EPSLA or EFMLEA if that self-employed individual were an employee of a third-party employer. The credit is subject to caps that are similar to those discussed above.
Health Plan Testing for COVID-19 Legislation. The FFCRA requires group health plans (including employer self-insured plans) and health insurance issuers offering group or individual health insurance coverage, including “grandfathered” plans for purposes of the Patient Protection and Affordable Care Act, during the period during which the President has declared an emergency or the Secretary has declared a public health emergency, to provide without any cost-sharing (deductibles, co-pays, or co-insurance) or other prior authorization requirements federally-approved forms of testing for COVID-19, and without any charges for office, urgent care or emergency room visits related to the testing.
IRS Updates Official Announcement Extending Due Date for Payment and Filing of Income Taxes
In an updated notice published today, the IRS announced that it is extending the due date for filing Federal income tax returns and for making Federal income tax payments (without interest or penalty) from April 15, 2020 until July 15, 2020. The postponement is applicable solely with respect to all Federal income taxes (including payments of tax on self-employment income) due on April 15, 2020, including income tax payments due in respect of the 2019 taxable year and estimated income tax payments due on April 15, 2020. The IRS Notice issued today provides that there is no limitation on the amount of the Federal income tax liability payment which may be so deferred (which represents a change from the IRS Notice issued earlier this week).
The Notice indicates that no extension is provided for the payment or deposit of any other type of Federal tax or the filing of any other type of Federal tax return.
State Conformity to CARES Act Federal Income Tax Relief
Most states use the federal income tax base as a starting point for computing state income tax, but the extent to which states will incorporate federal tax relief from the Coronavirus Aid, Relief, and Economic Security (CARES) Act will vary depending on each state’s conformity to the Internal Revenue Code (“Code”).
Nearly half the states are “rolling” conformity states, meaning they will automatically incorporate federal income tax changes into their state tax regimes. Other “static” or “fixed” conformity states have adopted provisions of the Code as it existed on a certain date, and so would need to take affirmative legislative action to so incorporate CARES Act changes. Disjoint between state and federal income tax provisions results in increased complexity for taxpayers. And taxpayers seeking CARES Act relief face further complications in states which conform to the Code in some areas but may “decouple” or depart from other federal income tax provisions, such as the CARES Act treatment of interest expense limitations, forgiveness of Small Business Administration (SBA) loans, and net operating losses (NOLs).
Increased Interest Expense Limitation. The CARES Act increased the limit of allowable business interest expense deductions under Code Section 163(j) from 30% to 50% for corporate taxpayers in 2019 and 2020. Partnerships are still subject to the 30% limit for 2019, but partners can treat 50% of their allocable share of 2019 excess business interest expense as paid in 2020.
The corporate income tax regimes of twenty-one states plus D.C. have rolling conformity to Code Section 163(j), and so incorporate these CARES Act changes. The conforming jurisdictions are Alabama, Alaska, Colorado, Delaware, D.C., Illinois, Iowa (2020 tax year only), Kansas, Louisiana, Maryland, Michigan (taxpayer’s option), Montana, Nebraska, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee (2019 tax year only), and Utah. New York, which has been a rolling conformity state, passed legislation on April 3, 2020 to specifically decouple from certain corporate tax provisions under the CARES Act, including the increased interest expense limitation. New York’s deductions for business interest expenses will continue to be limited to 30 percent “adjusted taxable income” plus business interest income and floor plan financing interest, consistent with the Tax Cuts and Jobs Act (TCJA).
Several other states which have rolling conformity to other sections of the Code decoupled from Section 163(j) prior to the CARES Act, and no fixed conformity state has adopted the CARES Act interest expense limitation changes. Accordingly, states other than those listed above would need legislative action to adopt the changes.
Forgiven SBA Loans. Forgiven loan funds received through the Paycheck Protection Program (PPP) introduced under the CARES Act will be treated as tax-exempt for federal tax purposes. Some commentators have theorized that because the CARES Act addressed tax-free treatment of forgiven loans in its statutory language but did not amend Code Section 108 (which treats discharge of indebtedness as taxable income), it is unclear whether rolling conformity states are able to adopt federal tax-free treatment of forgiven PPP loans without legislative action. However, no state has yet raised this issue.
Wisconsin passed legislation on April 15, 2020 which directly incorporates tax-free treatment of forgiven loans for state income tax purposes. The bill did not advance Wisconsin’s conformity date, but instead specifically conformed the state code to certain provisions of CARES Act relief, including permitting PPP loan forgiveness on a tax-free basis. Montana, a rolling conformity state, resolved ambiguity on May 12, 2020 with informal guidance on the Montana Department of Revenue website announcing that, to the extent SBA loans are forgiven under the CARES Act, they will be treated as tax-exempt for state income tax calculations. Oregon released informal guidance that forgivable PPP loans, whether or not forgiven, would not be subject to the state’s Corporate Activity Tax.
Washington has announced that decisions on how forgiven SBA loans will be treated under the state’s Business and Occupation tax are delayed “until further notice” and that taxpayers will meanwhile not be subject to penalties and interest. Hawaii and California, both static conformity states, have released guidance that the state does not currently conform to tax-free treatment for forgiven loans.
NOL Carryback. The CARES Act amended the Code to allow NOLs generated in 2018, 2019, or 2020 to be carried back up to five years to offset income from prior years. It also allows these NOLs to be fully deductible.
Most states with a corporate income tax have decoupled from federal NOL treatment under Code Section 172 and have state-specific NOL computation and/or carryback/carryforward provisions. Many states do not permit NOL carryback at all. Alaska, Maryland, and Missouri have complete rolling conformity to both NOL calculation and carryover periods for corporate income tax purposes. Colorado, Delaware, Florida, Kansas, and Oklahoma will conform to the carryback of corporate income tax NOLs under the CARES Act but have state-specific rules for corporate income tax NOL calculation.
Connecticut, D.C., Illinois, Kansas, Louisiana, Maryland, North Dakota, Ohio, and Utah have complete rolling conformity to both NOL calculation and carryover periods for individual tax purposes. Michigan, Minnesota, Montana, Nebraska, Oklahoma, and Oregon will conform to the carryback of individual income tax NOLs under the CARES Act but have state-specific rules for individual income tax NOL calculation.
States Toll of Statutes of Limitations, Impacting Taxpayer Exposure to Collection and Refund Claims
At least 23 states, including California, Delaware, New York, and Texas, suspended statutes of limitations for legal actions in response to the COVID-19 outbreak. These suspensions have implications for taxpayers that may be subject to collection actions or for those considering filing a claim for a refund.
The extent of exposure to collection in both judicial and administrative actions varies among states depending on the length and scope of the order, rule, or corresponding tax department guidance. For example, the Judicial Council of California adopted emergency rules to toll statutes of limitations “for all civil causes of action” until 90 days after the state of emergency is lifted. Additionally, Governor Newsom’s executive order authorized the California Franchise Tax Board (the “FTB”) to provide administrative relief. The FTB extended deadlines for taxpayers to file administrative refund claims, protests, and appeals but also granted itself additional time to issue assessments. As a result, taxpayers in California face longer exposure to collection actions in court and at the administrative level. In contrast, Delaware taxpayer exposure to collection is only minimally impacted by tolled limitations periods. The Supreme Court of Delaware ordered an extension through April 21, 2020 for statute of limitations and statutes of repose set to expire between March 23, 2020 and April 15, 2020. Delaware filing deadlines were extended to July 15, 2020 by law in conformity with the federal code. But only taxpayers with collection limitations set to expire between March 23 and April 15, 2020 face expanded exposure to collection actions in court.
Taxpayers should pay close attention to the text of applicable state orders, court rulings, and state tax department guidance to determine whether extended deadlines or limitations periods provide more time to analyze and claim refunds or preserve appeals. Some states have expressly tolled limitations for tax claims: The New Jersey Supreme Court ordered the extension of statutory filing deadlines to appeal state tax and property tax controversies. In other states, ambiguous language may give rise to arguments for extended times to claim a refund: Governor Lamont’s executive order for Connecticut “suspends” statutes of limitations for the duration of the emergency, which could mean that deadlines not set to expire during the emergency period would also be tolled.
Remote Workforce Issues
State Income Tax. A state’s authority to tax the business income of companies may change when employees or customers move from a central office to a home office in new, different taxing jurisdictions. If the presence of an employee, independent contractor, or customer in a new state or local jurisdiction meets the activity threshold needed to create nexus in that state or locality, taxpayers may face new business income tax exposure or payroll tax obligations in states where the business previously was not filing. Companies must similarly consider the potential risks of losing immunity from income tax nexus under Public Law 86-272. Companies should also ensure compliance with any state personal income tax withholding requirements in states where employees may be working from home, and which requirements may be altered if a state asserts nexus over the company due to employees working from home.
Even if a taxpayer already has nexus, there may be a change to the apportionment factors. For example, if payroll is a factor in that jurisdiction’s apportionment formula, the payroll factor could change based on the change in employees’ work locations. However, this may present an opportunity to reduce tax, particularly for local jurisdictions which impose gross receipts taxes apportioned based on a payroll factor, such as San Francisco and Los Angeles. In such instance, a taxpayer’s liability for this local tax may be diluted if many employees work from home outside of the city. The sales factor of the apportionment formula could also change if an employee performs income-generating services in a different state, or if a customer receives services in a different state (for example, Louisiana sources certain sales to the state where the customer principally manages the service contract).
Some states have provided relief from the impact of employees working from home due to stay at home orders. For example, Indiana, Maryland, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, and D.C. have issued guidance providing that they will not assert nexus on previously untaxed businesses if an employee is only working from home temporarily under a stay-home mandate.
Sales and Use Tax. The presence of employees or customers in new states may create sales tax nexus in the new states and may change how income from sales transactions is taxed and sourced for purposes of remitting local sales tax due. Some state and local jurisdictions require sales tax collected for an employee’s services to be remitted to the jurisdiction of an employee’s home office.
Massachusetts, Minnesota, and New Jersey have released guidance that employees working remotely within the state does not trigger nexus for sales and use collection purposes.
Tax Filing and Payment Deferrals
Many states and localities have postponed tax return and payment due dates, and/or provided relief from penalties and interest for late filings and payments.
Income Tax. Most of the 45 states with corporate income tax have delayed filing and payment deadlines. Many extended deadlines to July 15, 2020 in conformity with the federal extension. However, Massachusetts, Minnesota, New Hampshire, and Virginia retained original April 15 filing deadlines, although Virginia extended its payment deadline to June. Florida, Montana, and Ohio retained May filing deadlines.
Most states with individual income tax have extended filing and payment deadlines to July 15, except for Idaho which extended to June 15 and Mississippi which extended to May 15. New Hampshire and Virginia retained original filing deadlines (April 15 and May 1, respectively), but Virginia extended the payment deadline to June 1.
Many states have also extended deadlines for pass-through entities required to file composite income tax returns and to remit payment on behalf of non-resident members, including Alabama, California, and Ohio.
Indirect Tax. States have been less willing to grant extensions for indirect taxes. Twenty states granted some type of relief for sales and use tax obligations, either in the form of extended deadlines or waiver of penalty and interest. Some of these states only grant sales tax relief for small businesses.
Six states extended deadlines to pay property taxes and at least ten more issued guidance authorizing counties or municipalities to waive penalty and interest or extend local deadlines.
State Delays and Budget Shortfalls. Many state tax departments are requiring tax agency employees to telecommute from home, which potentially may impact tax department responses and field audit visits. State court tax litigation and administrative hearings are also likely to be delayed, and some states are planning for telephone or videoconference options. In addition, states or localities may seek to cover the economic shortfall from lost income tax, sales and use tax, and property tax revenues by pressing for new taxes, increasing tax rates, or with more aggressive enforcement.
Disaster Declarations. At least 48 states have declared a state of emergency in response to the coronavirus, several following the federal declaration issued March 13. Some state tax laws include alternative rates, caps, or implementation procedures in the event of a formally declared disaster. For example, under some emergency conditions, Texas provides options for certain taxing units to override normal voter approval requirements for increasing property tax rates. Disaster declarations may also increase a governor’s authority to influence state and local tax. Taxpayers should review legal tax authority for emergency provisions and carefully track governor’s orders during a declared disaster.
Employee Benefit and Executive Compensation Implications
The President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020 (the “Enactment Date”). This update provides a brief overview of the CARES Act provisions that could impact certain employers’ benefit plans and the compensation practices of certain businesses that accept financial assistance, loans, loan guarantees or investments under the CARES Act.
Since the Enactment Date, IRS, Department of the Treasury (“Treasury”), and the Employee Benefits Security Administration (“EBSA”) of the Department of Labor (“DOL”) have issued guidance addressing the CARES Act provisions relating to retirement and welfare benefit plans and extended timeframes and relief for various employee benefit plan filings and notices due to the impact of COVID-19 on plan administration. (Guidance issued by the DOL addressing non-tax issues under the Employee Retirement Income Security Act (“ERISA”) for employee benefit plans is not addresses in this section.)
Employee Benefit Plans
Special Rules for Use of Retirement Plans. Under the CARES Act, eligible retirement plans, which include 401(k) plans, may permit participants who are impacted by the coronavirus pandemic to access their account balances through a special “coronavirus-related distribution” and/or through changes to the plan’s loan provisions:
Coronavirus-Related Distributions. A “qualified individual” (as defined below) who is a participant in a 401(k) plan, 403(a) plan, 403(b) plan, or governmental 457(b) plan (an “eligible retirement plan”) may request an in-service “coronavirus-related distribution” (“CRD”) of up to $100,000 from the individual’s plan account during 2020. CRDs also are available to owners of IRAs. The $100,000 distribution amount is in the aggregate from all of an individual’s plans and IRAs.
Eligibility for the CRD is limited to an individual (a “qualified individual”):
- Who, or whose spouse or dependent (as defined in Section 152 of the Internal Revenue Code (the “Code”)), is diagnosed with the virus SARS-CoV-2 or with coronavirus disease (together “COVID-19”) by a test approved by the Centers for Disease Control and Prevention; or
- Who, due to COVID-19, experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced, 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.
The CARES Act provides that the administrator of the plan is permitted to rely on the participant’s certification that the conditions for the CRD are met. However, as discussed below, IRS has added an actual knowledge qualifier.
The 10% early distribution penalty for individuals under age 59½ and mandatory 20% tax withholding requirement are waived. While the CRD is still a taxable distribution, it may be included in gross income ratably over three years.
Participants may recontribute the amount of the CRD to the plan or an IRA during the 3-year period following distribution without regard to Code’s contribution limits.
Plan Loan Relief. The maximum loan amount available under an eligible retirement plan for a qualified individual is increased to the lesser of $100,000 (minus an individual’s outstanding plan loans) or 100% of the individual’s vested account balance from the lesser of $50,000 (minus an individual’s outstanding plan loans) or 50% of the individual’s vested account balance. The increased limits apply to plan loans made during the 180-day period beginning on the Enactment Date and ending on September 23, 2020.
In addition, plan loan repayments that are due between the Enactment Date and December 31, 2020 for outstanding loans of qualified individuals may be delayed for one year. When repayments recommence, the repayment amount is to be adjusted to reflect the delay and interest that accrued during the delay period. However, the delay period is disregarded for purposes of the maximum loan period.
On May 4, 2020, IRS posted guidance on the IRS website, in a question and answer format, that addresses coronavirus-related distributions and plan loan changes referenced above (“IRS CARES Act Q&As”). The IRS CARES Act Q&As address a number of implementation and operational questions for plan sponsors and administrators. Among other explanations and comments, the Q&As provide:
- Additional guidance will be issued and, where appropriate, is expected to follow the approach used in Notice 2005-92, which provided guidance on special distribution and plan loan provisions under the Katrina Emergency Tax Relief Act of 2005.
- IRS and Treasury are currently receiving and reviewing comments from the public requesting that the qualified individual list of factors be expanded.
- If all or a portion of the CRD is repaid to a plan, it is treated as a direct trustee-to-trustee transfer, thereby avoiding the distribution being treated as taxable income, and the individual will file an amended federal income tax return(s) to claim a refund or offset, as appropriate, of the tax attributable to the amount of the CRD included in income for the year(s).
- CRDs and the plan loan changes under the CARES Act (both increased plan loan limits and the plan loan repayment delay) are optional; a plan sponsor is not required to offer any of these options. If an employer does not add the CRD to its plan, a qualified individual may still treat a distribution that otherwise meets the requirements of a CRD as a CRD on the individual’s federal income tax return.
- A plan administrator may rely on an individual’s self-certification that the individual is eligible to receive a CRD, “unless the administrator has actual knowledge to the contrary” (a requirement that is not in the CARES Act).
- An eligible retirement plan is not required to accept repayment of a participant’s CRD; if accepted, however, the CRD is to be treated as a rollover contribution.
- CRDs should report the distribution on a Form 1099-R (more information on CRD reporting is expected later in 2020).
Waiver of 2020 Required Minimum Distribution. The required minimum distribution (“RMD”) for 2020 is waived for defined contribution plans, including 401(k) plans, and IRAs. RMDs are not waived for pension plans. Note that waiver is not limited to qualified individuals.
Plan Amendments. The plan must be amended for the CRD, loan provision and/or waiver of the 2020 RMD provisions no later than the end of the plan year commencing on or after January 1, 2022 (or such later date provided by Treasury) – December 31, 2022 for a calendar year plan. Governmental plans have two additional years to be amended. However, while there is a delayed amendment deadline, these are current changes to a plan. This raises governance issues. For example, if approval of plan amendments is reserved to the plan sponsor’s board of directors, it would appear that the board’s approval of the changes must be obtained prior to (or through ratification afterwards, assuming the board, at least, has adequate prior knowledge of the changes) in order to bring those changes into effect.
Pension Funding Relief for Single-Employer Plans. The due date for funding contributions for single-employer defined benefit pension plans otherwise due during 2020 is delayed until January 1, 2021, subject to interest due to the delay. For purposes of the plan’s adjusted funding target attainment percentage (“AFTAP”), the plan may elect to use the AFTAP for the plan year ending before January 1, 2020, for plan years which include calendar year 2020.
Health Savings Accounts for Telehealth Services. A high-deductible health plan with a health savings account (“HSA”) is permitted to cover telehealth services prior to a participant reaching the required deductible.
Over-the-Counter Medical Products without Prescription. Participants may use funds in their HSAs and flexible spending accounts for the purchase of over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription from a physician.
DOL, IRS and Treasury Joint Notice. EBSA issued a set of frequently asked questions (“FAQs”), COVID-19 FAQs for Participants and Beneficiaries, on April 28, 2020 (“DOL FAQs”), and the DOL, IRS and Treasury issued a joint notice, Final Rule: Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak, on May 4, 2020 (the “Joint Notice”), addressing the extension of timeframes for notices required under both ERISA and the Code for group health plans, disability and other welfare plans, and retirement plans during the period commencing on March 1, 2020, and ending 60 days after the announced end of the COVID-19 National Emergency (the “Outbreak Period”).
The DOL FAQs and Joint Notice provide that all group health plans, disability and other employee welfare benefit plans and retirement plans subject to ERISA or the Code must disregard the Outbreak Period for all plan participants, beneficiaries, qualified beneficiaries, or claimants wherever located in determining the periods and dates of actions relating to:
- Special enrollment for group health plans;
- COBRA continuation coverage elections and premium payments; and
- Claims procedures and external review processes.
Basically, for these purposes, the period of time that covers the Outbreak Period is ignored and treated as if it never existed.
The Joint Notice provides several examples of how the extended timeframes work, assuming, hypothetically, that the National Emergency were to end on April 30, 2020, such that, the Outbreak Period would end 60 days later on June 29, 2020.
Executive Compensation Restrictions on Businesses that Receive Relief
Under the CARES Act, the Secretary of the Treasury has the authority to make loans, loan guarantees and other investments in U.S. eligible businesses, including air carriers and other U.S. businesses not afforded adequate relief under the CARES Act, in an aggregate amount up to $500 billion. The Secretary will also provide financial assistance for the continuation of payment of employee wages, salaries and benefits to certain passenger air carriers, cargo air carriers and related contractors, in an aggregate amount of up to $32 billion. Businesses that accept loans, loan guarantees or investments under this program, and air carriers and contractors that accept financial assistance, must comply with certain covenants (such as, workforce retention requirements, prohibitions against stock buybacks and dividends), including restrictions relating to executive compensation practices.
Executive Compensation Restrictions. As a condition to receiving financial assistance, loans, loan guarantees or investments, the business must limit future payments of executive compensation and severance amounts to certain officers or employees whose total compensation exceeded certain thresholds.
Any officer or employee whose total compensation exceeded $425,000 in calendar year 2019 cannot receive:
- total compensation during any 12-month period that exceeds the officer’s or employee’s 2019 total compensation; or
- severance compensation or benefits that exceed twice the officer’s or employee’s 2019 maximum total compensation.
And, any officer or employee whose total compensation exceeded $3 million in calendar year 2019 cannot receive total compensation during any 12-month period that exceeds the sum of $3 million plus 50% of the officer’s or employee’s 2019 total compensation that exceeded $3 million.
Executive Compensation Restriction Period. For eligible businesses who receive loans or loan guarantees, the executive compensation restrictions apply once the agreement is executed and for one year after the date on which the loan or loan guarantee is no longer outstanding. For air carriers and related contractors who receive financial assistance, the executive compensation restrictions apply for a set two-year period from March 24, 2020 to March 24, 2022. For eligible businesses in which investments are made, the period during which these restrictions apply is less clear.
Considerations. The relevant compensation items described above relate to “total compensation” as described in the stimulus package. This “total compensation” concept is defined broadly in the draft stimulus package to include “salary, bonuses, awards of stock and other financial benefits.” At this time, it is unclear whether such “total compensation” will relate to actual compensation that is paid (e.g., W-2 compensation) during the relevant period or whether the concept will be broader. For instance, when the Troubled Asset Relief Program was passed in 2008, certain limits on executive compensation took into account, among other things, deferred compensation credits and accruals.
In addition, other than exceptions for compensation arrangements under existing collective bargaining agreements, the limits on executive compensation described above appear to be absolute (rather than something that can be violated and then offset by a loss of tax deduction or payment of excise tax). Therefore, it would be important for companies to understand their compensation arrangements and contractual obligations, and adjustments that would be required to comply with the executive compensation restrictions, before accepting any type of relief under the CARES Act.
The CARES Act has important implications for employers, benefit plan providers and businesses that utilize its relief programs and we expect that other considerations and issues will arise as the programs and provisions are implemented.
Other Tax Relief
IRS Grants Relief to High Deductible Health Plans (HDHPs). On March 11, 2020, the IRS issued Notice 2020-15, which allows an HDHP to provide benefits relating to testing for and treatment of COVID-19 with no deductible, or a reduced deductible, without adversely affecting its qualification as an HPHP.
Other Tax Events and Issues
Tax Court Trial Session Cancellations. On March 11, 2020, the United States Tax Court announced the cancellation of trial sessions scheduled to occur in March 2020.
We will continue to provide you regular updates on the latest Tax issue developments surrounding COVID-19 as they become available.
Baker Botts tax lawyers help some of the world's largest corporations, partnerships, and other joint ventures and independent businesses with their tax challenges. We advise on topics ranging from corporate tax issues, employee benefits and executive compensation matters to tax controversies and state and local taxation. In addition, we counsel individuals, families and entrepreneurs on wealth transfer, succession planning and other estate tax issues.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of approximately 725 lawyers practicing throughout a network of 13 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy and technology sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.