On March 13, 2020, President Trump issued an emergency declaration in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. Recognizing the rapidly evolving state of affairs and the harm to individuals and to businesses brought on by the spread of COVID-19, federal and state governments alike have responded promptly with temporary changes to our tax laws that are intended to help mitigate the impact of COVID-19 on individuals and businesses alike.
Extended Due Dates for Income Tax Returns and Payments
The IRS has extended both tax return filing and payment deadlines for a number of taxpayers. July 15, 2020, is now the return filing due date for individual, trust, and corporate calendar year 2019 income tax returns normally due April 15. The tax payment deadline has also been extended to July 15, with no limit on the amount of income tax payments that may be postponed until that date (earlier guidance included caps on the amount that could be deferred). The relief applies to any balance due with respect to a taxpayer’s 2019 income tax liability, as well as first quarter 2020 estimated income tax payments. Interest and late filing and payment penalties will be waived on payments and returns normally due April 15, 2020, if filed and paid by July 15, 2020 (see IRS Notice 2020-18).
Note that the extension doesn’t apply to other types of federal taxes (e.g., payroll taxes) or to the filing of federal information returns.
Although the federal guidance does not directly address state income tax filing obligations, many states have separately responded, with most, including Alabama, extending the filing and payment deadlines to be consistent with federal guidance. The AICPA has published a helpful chart summarizing the state responses as of March 23, 2020.
Note that the state responses may apply to taxes other than just income taxes. For instance, the Alabama Department of Revenue (ADOR) announced that restaurants and bars, as well as small businesses, whose monthly retail sales during the previous calendar year averaged $62,500 or less may file their monthly sales tax returns for the February, March, and April 2020 reporting periods without paying the state sales tax reported as due. Late payment penalties will be waived for these taxpayers through June 1, 2020. Thankfully, the ADOR added that similar sales tax relief may be available on a case-by-case basis to other businesses significantly impacted by COVID-19 and the preventative measures being taken to limit its spread in Alabama. Last Friday, the ADOR also announced there will be similar relief for taxpayers owing state lodging taxes, such as hotels, motels and B&Bs, for those same tax periods.
Tax Credits Provided by the Families First Coronavirus Response Act
As previously reported, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law on March 18. Effective “no later than” April 2, 2020, and for the duration of 2020, the FFCRA will require employers with fewer than 500 employees to provide employees with paid sick leave and expanded Family and Medical Leave Act (FMLA) rights (both subject to exceptions for certain healthcare providers, emergency responders, and businesses with fewer than 50 employees if compliance would jeopardize the business as a going concern), as well as free testing for COVID-19. Based on the joint news release mentioned below, these mandates and tax credits became effective last Friday.
Importantly for tax advisers, the FFCRA also provides two refundable payroll tax credits to help businesses offset the costs associated with mandated paid leave. Although the FFCRA appears to limit the credit to the employer portion (but not the employee portion) of the Old-Age, Survivors, and Disability Insurance (OASDI) component of payroll taxes (i.e., the 6.2% employer portion of the Social Security tax), a news release jointly issued last Friday, March 20 by the IRS and the Departments of Treasury and Labor (IR-2020-57) states that eligible employers may retain both the employer’s and employee’s share of FICA, plus their employees’ federal income tax withholdings. And that apparently includes the payroll taxes and federal income tax withholdings of all their employees – not just those on sick leave or FMLA leave. We highlight below the two helpful examples included in the news release. The credits are designed to promptly and fully reimburse qualifying “small and mid-size” businesses for the cost of providing coronavirus-related leave to their affected employees.
Eligible employers can claim both credits in an amount generally equal to 100% of the amount of sick/family leave wages paid pursuant to the FFCRA, subject to certain limitations discussed below. If there are not sufficient payroll taxes to cover the cost of qualified sick and family leave paid, employers may file a request for an accelerated refund from the IRS, which according to the news release the IRS expects to process “in two weeks or less.” More detailed guidance is promised this week.
Similar credits are available to self-employed individuals (presumably including partners in small and mid-size professional services firms) who must take qualified sick leave. Those credits would be claimed on the person’s individual income tax return and on their quarterly estimated tax returns as well (see Section 7002 of the FFCRA).
Paid Sick Leave Tax Credit
Eligible employers (i.e., those with fewer than 500 employees) that are required under the FFCRA to offer paid sick leave to an employee who is unable to work because of COVID-19 may receive a refundable sick leave tax credit equal to 100% of the amount of wages paid (including qualified health plan expenses relating to that employee’s wages). The amount of the credit is limited, however, to $200 per day if the employee is unable to work or telework because the employee is caring for a minor child whose school or childcare facility is closed, is taking care of an individual subject to a government quarantine or isolation order, or has a substantially similar condition as specified by the U.S. Department of Health and Human Services. But the credit is increased to the lesser of the employee’s regular rate of pay or $511 per day if the employee is on leave because he or she:
- Is subject to a federal, state or local quarantine or isolation order related to COVID-19;
- Has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19; or
- Is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
Notwithstanding, the credit will be limited to 10 days of wages paid per employee per quarter, or up to $5,110 per employee per quarter.
Paid Family Leave or “Child Care Leave” Tax Credit
Eligible employers may also receive a separate refundable family leave tax credit for wages paid to an employee (and costs to maintain health insurance coverage for the employee) who is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to COVID-19. The family leave tax credit, referred to in the news release as the child care leave credit, is limited to two-thirds of the employee’s regular rate of pay, up to $200 per day, and $10,000 in the aggregate for all calendar quarters. Up to 10 weeks of qualifying leave can be counted toward the family leave/child care leave tax credit.
Helpful Examples Given
As mentioned, the news release is generally favorable to eligible employers and fills in some gaps left from the hastily enacted FFRCA. Two examples are offered at the end of the news release that we commend to your reading. The first example confirms that creditable payroll taxes are not limited to directly affected employees of the employer but those withheld from “all its employees” wages. Thus, if an eligible employer paid $5,000 in “sick leave” and is otherwise required to deposit $8,000 in payroll taxes for all employees, it’s entitled to retain $5,000 and deposit only the $3,000 balance on its next regular deposit date. The second example affirms that if the eligible employer paid $10,000 in sick leave and was otherwise required to deposit $8,000 in payroll taxes, then it can retain the entire $8,000 and “file a request for an accelerated credit [cash] for the remaining $2,000.” Note, however, that neither example mentions that health insurance premiums paid by the employer for eligible employees with respect to their leave period can be factored-in as well (see Section 7001(d) of the FFCRA).
The payroll tax credits discussed above are optional. Thus, an eligible employer is not required to claim the credits. But if an employer does claim the credits, the employer is required to include the amount of the credits it receives in its gross income for federal income tax purposes. Additionally, any wages taken into account in determining the sick leave or family leave/child care leave credits allowed under the FFCRA will reduce the I.R.C. § 45S paid family and medical leave credit that would otherwise be available to the employer.
We will continue to provide guidance and updates on the status of these emergency measures as they evolve over the coming weeks. Bradley’s Tax and Governmental Affairs practice groups are actively monitoring and engaging with Congress and the Administration on these issues. Please contact Will Thistle, Bruce Ely or David Stewart if you have any questions or would like to engage in the COVID-19 policy process.
For more information on COVID-19, and how it may be affecting your business, please visit our Coronavirus Disease 2019 resource page.