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Private Investment Funds, Related Entities and Individuals Can Benefit From COVID-19 Relief

Anchin AlertApril 21, 2020Anchin's Financial Services Practice

Private Investment Funds, Related Entities and Individuals Can Benefit From COVID-19 Relief

The COVID-19 pandemic has put significant stress on the liquidity and profits of hedge funds, private equity/venture capital funds and their respective portfolio companies. On March 18, 2020, the Families First Coronavirus Response Act and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) were signed into law. Given these uncertain times and the multitude of changes, provisions and opportunities these laws present, we’ve prepared a general summary of certain relevant matters that private investment funds, related entities and individuals should consider in order to help navigate this crisis. Accordingly, please use this guide for general information purposes only, and please reach out to us with any specific questions or issues you have.

Sick & Family Leave Credits

Beginning April 1, 2020, private employers and nonprofit organizations with fewer than 500 employees are required to pay their employees (1) their full wage -- up to $511 per day or $5,110 in total -- if the employees are unable to work because of Coronavirus-related self-quarantine or because they have Coronavirus symptoms, or two-thirds of their regular wage – up to $200 per day or $2,000 in total – if they take time off to care for a family member who is in self-quarantine because of Coronavirus or following a child’s school closing (in each case for up to 10 days), and (2) two-thirds of their regular wage (up to $200 per day or a $10,000 maximum) if the employees are unable to work because they need to care for children. An employer’s obligation for paid sick leave ends when the employer has either paid the employee for the number of hours that the employee generally works within a two-week period (up to 80 hours) or when the employee returns to work. In order for the employee to be eligible for paid leave, the employee must have been on the employer’s payroll and worked for the employer for at least 30 days. An employee who is laid off on or after March 1, 2020, and rehired by the same employer before the end of the year is eligible for paid leave without having to satisfy the 30-day requirement after being rehired as long as the employee satisfied the requirement before being laid off.

A refundable payroll tax credit is available to employers through the end of 2020 to cover wages paid to employees while they take time off under these new sick and family leave programs. The sick leave credit is for wages up to $511 per day or $200 per day if the sick leave is to take care of a family member or child following the child’s school closing. The family leave credit is for wages up to $200 per day (or a $10,000 maximum) while the employee is receiving paid family leave. The credit can be claimed each quarter and is not available for employers receiving credit for paid family and medical leave under the 2017 Tax Cuts and Jobs Act (TCJA).

Form 7200, Advance Payment of Employer Credits Due to COVID-19, provides that employers may use the sick and family leave credits to offset all federal employment taxes, with any excess credits being refundable. The IRS has posted additional guidance on its website on how to obtain the sick and family leave credit.

https://www.irs.gov/newsroom/covid-19-related-tax-credits-for-required-paid-leave-provided-by-small-and-midsize-businesses-faqs#how_to_claim

The sick leave credit covers 100% of a self-employed individual’s personal qualified sick leave equivalent or 67% of an individual’s qualified sick leave equivalent if they are taking care of a sick family member or taking care of a child following the child’s school closing. A self-employed individual’s qualified sick leave equivalent amount is the number of days during the taxable year that the individual cannot perform services and is entitled to sick leave (up to 10 days), multiplied by the lesser of average self-employed income (or 67% of that income if they are taking care of a sick family member or child following a school closing), or $511 per day to care for the self-employed individual ($200 per day to care for a sick family member or child following a school closing). Self-employed individuals can receive a family leave credit for as many as 50 days multiplied by the lesser of $200 or 67% of their average self-employment income, up to a maximum of $10,000.

Employee Retention Credit for Employers

Employers are eligible for a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to employees beginning March 13, 2020 through December 31, 2020 if the employers are engaged in a trade or business in 2020 and the wages are paid (1) while operation of the trade or business is fully or partially suspended due to a governmental order related to COVID-19 or (2) there is a 50% decline in gross receipts compared to the same quarter in 2019. If an eligible employer meets the gross receipts test in one quarter, it can continue qualifying for the credit until a quarter in which gross receipts are greater than 80% of the corresponding quarter in 2019. Qualified wages depend on the number of full-time equivalent employees (“FTEs”) in 2019. For employers with more than 100 FTEs, the credit is available only with respect to wages paid to employees who are not providing services due to the circumstances described in (1) or (2) above. For employers with 100 or fewer FTEs, all wages count. An aggregation rule applies to treat all entities under common ownership as one employer, including for purposes of determining who is an eligible employer and for the 100 FTE threshold. The credit is capped at $5,000 (50% of $10,000 qualified wages) per employee for all calendar quarters. Charitable (Section 501(c)) organizations are eligible for the credit but governmental entities and companies receiving small business interruption loans under the Small Business Administration’s Paycheck Protection Program (the “PPP”) (see below) are not.

Eligible employers can get the benefit now (before waiting and claiming it when they file their quarterly payroll tax return on Form 941) by either reducing payroll tax deposits, including withheld income taxes and FICA taxes not already being deferred (i.e., Medicare payroll taxes) or filing a Form 7200 (Advance payment of Employer Credit Due to COVID-19).

The IRS has posted additional guidance on its website on how to obtain the employee retention credit.

https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

Deferral of Payment of Certain Employer and Self-Employment Payroll Taxes

The CARES Act allows employers and self-employed individuals to defer payment of the employer’s share (6.2%) of the social security tax they are otherwise responsible for paying in 2020, effective for payments due from March 27, 2020 to December 31, 2020. Fifty percent (50%) of the deferred payroll taxes are due on December 31, 2021, and the remaining amounts are due on December 31, 2022. These provisions are available to everyone, regardless of income. However, this deferral is not available to employers whose loan is forgiven (see next paragraph below) under the PPP. There is no application or other form filing to get this benefit.

The IRS has posted additional guidance on its website on deferral of employment tax deposits and payments through December 31, 2020. Importantly, the guidance clarifies that employment taxes may be deferred, and are payable under the terms above until any loan forgiveness is granted.

https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020

Net Operating Losses (NOLs)

The CARES Act grants taxpayers a five-year carryback period for NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (calendar years 2018, 2019, and 2020). Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable. As a result of the extended carryback provision, a corporation can carry back its 2018, 2019 and 2020 NOLs to offset pre-2018 income that was taxed at rates of up to 35% and in turn generate current tax refunds at a favorable rate differential. Furthermore, certain taxpayers that anticipate generating losses into 2021 might consider changing their tax year, if possible, for example to a year ending prior to December 31, 2020, to ensure that some portion of calendar year 2021 is within a tax year that starts prior to January 1, 2021.

Prior to the passage of the 2017 TCJA legislation, taxpayers were allowed to claim an NOL deduction for regular income taxes in an amount equal to the total of the NOLs that could be carried forward and back to that year.  The TCJA changed this rule by imposing an 80% of taxable income limitation on the use of NOLs arising in tax years beginning after December 31, 2017. Pre-TCJA law continued to apply to NOLs arising on or before December 31, 2017. The CARES Act temporarily suspends the 80% of taxable income limitation on the use of NOLs for tax years beginning before January 1, 2021.

With the passage of the Cares Act, NOLs may be treated three different ways as follows:


Taxpayers may want to consider carrying back 2018 NOLs, especially if prior tax rates are higher than anticipated future rates. For losses that are projected to occur after 2020 and can no longer be carried back, taxpayers may want to consider accelerating expenses or deferring income in the current year to the extent they have income in the prior five years, particularly if the income was taxed at rates higher than the tax rate the taxpayer is currently paying. Note that carrying back losses may have undesired effects on other items on the tax return. It is therefore important to map out and plan the effects of any loss carrybacks before making decisions.The CARES Act also made technical corrections to the 2017 TCJA by clarifying that the taxable income limitation should be computed without regard to the qualifying business income deduction under Section 199A or the FDII and GILTI deduction under Section 250 in any tax year beginning after December 31, 2020. It also provides that the limitation is to be calculated based on 80% of taxable income after giving effect to the use of pre-2018 NOLs; that is, taxable income for this purpose should be determined after reduction to reflect absorption of pre-TCJA NOLs.

The IRS recently provided guidance under the CARES Act to taxpayers with NOLs.

https://www.irs.gov/newsroom/irs-provides-guidance-under-the-cares-act-to-taxpayers-with-net-operating-losses

*Anchin Observation: Most states have their own provisions addressing NOL carrybacks and carryforwards, with significant differences among the states. Therefore, taxpayers will need to continue to monitor any changes in relation to the states in which they do business.

Modification of Limitation on Losses for Non-Corporate Taxpayers

For tax years beginning after December 31, 2017 and ending before January 1, 2026, the 2017 TCJA implemented a new rule that disallowed the deduction of excess business losses by non-corporate taxpayers (individuals, trusts and estates) and instead forced such taxpayers to carry forward such losses as net operating losses. An excess business loss is the amount by which the total deductions from your trades or businesses are more than your total gross income or gains from your trades or businesses, plus the threshold amount. For 2019, the threshold amount is $510,000 ($500,000 for 2018) for married taxpayers filing joint returns and $255,000 ($250,000 in 2018) for all other taxpayers.

The CARES Act retroactively defers the effective date of this rule for tax years beginning after December 31, 2020, meaning that non-corporate taxpayers can now recognize such losses for the 2018, 2019 and 2020 tax years. To the extent that a 2018 or 2019 tax return has been filed and reported an excess business loss, a taxpayer will need to evaluate amending the return to claim a refund of taxes or to report a NOL (the NOL rules also changed under the CARES Act as discussed earlier). However, the at-risk rules and the passive activity loss rules are still applicable and have not been deferred. Note that the CARES Act does not address the requirement of taxpayers to file amended returns to align with the change in the statute. In the case where a taxpayer is utilizing an NOL that is a result of an excess business loss in 2018, which now no longer appears to exist, the taxpayer may need to amend its 2018 tax return to address this change. 

The IRS is aware that there are questions from practitioners and taxpayers on the filing of corporate and individual refund claims that may be available under the CARES Act. The IRS is currently exploring available options and expects to issue filing instructions in the coming days. The IRS recommends that taxpayers await further instruction before utilizing traditional processes.

The CARES Act also included a number of technical corrections, effective as if included in the TCJA, including one that would deny any deductions, gross income or gains attributable to any trade or business of performing services as an employee into the excess business loss calculation.  Effectively, this provides that wage income would not be includible as business income for purposes of the excess business loss limitation. Additionally, technical amendments were included that clarify that deductions for capital losses from sales or exchanges of capital assets are not included in the calculation of an excess business loss. Also, capital gains from sales or exchanges of capital assets are only included in the calculation to the extent of the lesser of (1) the net capital gain attributable to a trade or business or (2) capital gain net income. These technical corrections and amendments are retroactive to taxable years beginning after December 31, 2017.

Modifications of Limitations on Business Interest

Prior to the enactment of the CARES Act, section 163(j) allowed a taxpayer to deduct business interest expense only up to the sum of the taxpayer’s business interest income for the tax year, 30% of the taxpayer’s adjusted taxable income (“ATI”) for the tax year plus the taxpayer’s floor plan financing interest for the tax year. For this purpose, ATI equals the taxpayer’s taxable income computed without regard to (1) any item of income, gain, deduction or loss that is not properly allocable to a trade or business, (2) business interest or business interest income, (3) the amount of any NOL deduction, (4) the 20% deduction for certain pass through income and (5) for tax years prior to January 1, 2022, any deduction allowable for depreciation, amortization or depletion. In general, business interest expense that is not allowed as a deduction is carried forward indefinitely or added to each partner’s basis in their respective partnership interests when disposed of. The business interest expense limitation generally will not apply to taxpayers (other than a tax shelter) with average gross receipts that do not exceed $26 million for the three-taxable-year period ending with the prior taxable year.

The CARES Act made several temporary changes to section 163(j) with the amendments generally applicable to tax years beginning after December 31, 2018.

  • It increases the section 163(j) limitation by including 50%  of  ATI in the limitation amount instead of 30% of  ATI. However, this increase to the limitation percentage only applies to certain taxable years.
    • For partnerships, the increase to 50% of ATI applies to all tax years beginning in 2020 only.
    • For other taxpayers, such as corporations (including S corporations) and individuals, the increase to 50% of ATI applies to all tax years beginning in 2019 or 2020.
    • A taxpayer may make an election not to have the 50% of ATI rule apply. A partnership electing not to apply this increase to its interest deduction limitation calculation can only make the election for years beginning in 2020. Other taxpayers such as corporations (including S corporations) and individuals, can make the election with respect to years beginning in 2019, 2020 or both. Such an election is irrevocable without the Secretary of the Treasury’s consent.
  • In the case of partnerships, 50% of any excess business interest that was allocated to a partner in 2019 instead can be deducted in 2020 without being subject to the 50% limitation for partnerships in 2020. The remaining 50% of the excess business interest in 2019 would be subject to the 2019 limitation (still 30% for partnerships).
  • It allows an election for taxpayers to apply their 2019 ATI (as opposed to their 2020 ATI) to their 2020 section 163(j) limitation computation. Taxpayers making this election will compute their section 163(j) limitation for a tax year beginning in 2020 based on their ATI for their last tax year beginning in 2019.

*Anchin Observation: For partnerships, the CARES Act allows a deduction in 2020 for 50% of the excess business interest expense that was disallowed in 2019, without being subject to the 50% limitation for partnerships in 2020. This could provide the opportunity for taxpayers to accelerate a portion of their excess business interest deduction into the 2020 tax year, in order to offset their taxable income. Again, it is important to model out and plan the effects of these provisions before making decisions.

*Caution: For the 2019 tax year, there are certain states that do not conform to section 163(j). In these states, this temporary IRS change would have no effect. Other states that conform the Code on a moving or rolling basis and currently conform to section 163(j) would generally adopt the temporary percentage increase as well as the elections to not apply the 50% limitation and use the 2019 ATI in 2020. The states that have fixed date conformity in adopting section 163(j) would not adopt these changes until and unless their state legislature takes some further action. For these states this may prove challenging given that a number of state legislatures have temporarily adjourned with no appointed date for resumption in 2020 and others are suspended due to COVID-19. On April 3, 2020, New York became the first state to decouple from particular features of the CARES Act for corporation franchise tax and personal income tax purposes. Because the New York state legislation was a budget act, the decoupling extends to New York City taxes, as well. It is doubtful that New York will be the only state to decouple from some or all aspects of the CARES Act. All of this will add an additional layer of complexity to what is already a significant compliance burden to taxpayers (especially corporate filers) and creates yet another state-federal difference to be tracked and managed.

*Anchin Observation: The modification of the section 163(j) rules and the temporary five-year NOL carryback provision provide a liquidity opportunity for corporations that expect significant tax losses in 2020 as a result of the COVID-19 pandemic, although much of that liquidity may be deferred until corporations file their 2020 federal income tax returns in 2021. Specifically, the election to use a higher 2019 ATI number in the corporation’s 2020 section 163(j) interest deduction calculation should maximize a corporation’s potential NOL in 2020.  That NOL can then be carried back to obtain refunds for taxes paid in tax years 2015 through 2019.

Immediate Expensing of Costs Associated With Improving Qualified Improvement Property (“QIP”)

The CARES Act corrects an error in the 2017 TCJA that prevented businesses from expensing certain costs for improvements to QIP and required the costs to be depreciated over the 39-year life of the building.  QIP is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed in service. QIP does not include improvements that are attributable to the enlargement of the building, elevators or escalators, or the internal structural framework of the building.

Based on a technical correction under the CARES Act, QIP placed in service as of January 1, in 2018 and thereafter is now 15-year property and is eligible for 100% bonus depreciation, thereby providing many taxpayers with significant tax saving opportunities while also incentivizing taxpayers to continue to invest in improvements.

Taxpayers who placed QIP into service in 2019 and have not yet filed their 2019 federal tax return can now treat QIP assets as 15-year property eligible for bonus depreciation. Depending on specific facts and circumstances, this may result in significant tax overpayments for some taxpayers who had originally depreciated such property over 39 years.

Taxpayers who placed QIP into service in 2019 and who have already filed their 2019 federal tax return have the following options:

  • If the tax return was filed without an extension, then an amended 2019 tax return may be required in order to take advantage of 100% bonus depreciation. If the tax return was for a pass-through entity such as a partnership or S corporation, individual tax returns of the owners of such entities may also need to be amended in order to obtain a refund of taxes paid.
  • If an extension was filed for the tax returns or if the original due date of the tax return has not yet been reached, a superseding tax return may be filed reflecting the bonus depreciation on QIP assets.

Taxpayers who placed QIP into service in 2018 may have the following options:

  • 2018 tax returns can be amended reflecting the bonus depreciation on QIP assets. This would change taxable income for 2018 as well as subsequent tax years.
  • File Form 3115 (Application for Change in Accounting Method) requesting an automatic change in depreciation accounting to catch-up depreciation from 2018 on the 2019 tax return.

*Caution: For partnerships seeking to amend a prior year return, it will be necessary to consider whether the partnership is subject to the Centralized Partnership Audit Regime (CPAR). Under CPAR, the partnership files an Administrative Adjustment Request (AAR), rather than an amended return, and the impacted partners will determine the potential benefit of the increased depreciation deduction for the year of change and will reflect that benefit against their 2020 tax liability (assuming the AAR is filed during the partners’ 2020 tax year). Certain small partnerships are eligible to elect out of CPAR each year. If a partnership validly elects out of the CPAR, the partnership may amend its Schedules K-1 after the due date of the partnership return to which the statements relate. The partners would then file amended income tax returns to claim the additional depreciation deductions. The IRS recently released Rev. Proc. 2020-23 which provides limited (and temporary) relief for these rules so that taxpayers may benefit from some of the retroactively effective provisions of the CARES Act. Under this revenue procedure, a partnership may adjust a previously filed tax return by filing an amended tax return (as opposed to an AAR). This relief applies to partnership tax years that began in 2018 or 2019, and only for tax returns filed before April 8, 2020 (the effective date of this revenue procedure). In addition, in order to qualify for this relief, a partnership must file its amended tax return before September 30, 2020.

*Anchin Observation:  Taxpayers who placed QIP into service in 2018 or 2019 and who have already filed the applicable federal tax returns could decide to file Form 3115 with their 2020 tax returns and catch-up on all past depreciation benefits in the 2020 tax year.

Due to the interplay between this change and other attributes of the tax code (e.g., section 163(j) business interest limitations, NOL rules, etc.), taxpayers should consult their tax advisors and model out planning ideas and opportunities before making decisions on how best to proceed. Please also note that many states decouple from the federal bonus depreciation rules (meaning they do not recognize the immediate expensing allowed at the federal level); therefore tax benefits at the state level may be limited.

SBA Loan Forgiveness Does Not Give Rise To Cancellation of Indebtedness Income?

The new law clearly states, contrary to typical tax law, that debt forgiven under the PPP won’t be counted as taxable income. However, the law says nothing about whether those ordinary expenses for salaries and other costs still trigger deductions like they normally do.

If they don’t yield deductions, then the program is basically a wash from a tax perspective, which limits the potential value of the program. Tax-free income comes in, nondeductible expenses go out, and businesses pay taxes only on the revenues and expenses outside the loan forgiveness program. The forgiveness would still give a significant boost to struggling firms and help them survive. But if businesses can deduct those expenses, then the program contains a benefit much more powerful than the loan forgiveness alone. Tax-free income comes in and deductible expenses go out. Those deductions could offset other income from the business or other income generated by the business owners. Even if that leads to businesses reporting tax losses now, they can use other provisions of the new law to utilize those losses against prior years’ profits and claim refunds.

The bottom line is that the IRS is going to have to clarify this and do it very quickly as people that are borrowing need to know that information now. Making the loan forgiveness tax free without allowing the deductions almost defeats its purpose, because it yields the same basic result as making the loan forgiveness taxable and allowing the deductions. That suggests that Congress may have intended to allow deductions against tax-free income, but we can’t be sure without further clarification from the government.

Other COVID-19 Planning Considerations

Qualified Disaster Relief Payments: As the COVID-19 pandemic continues to substantially affect businesses and their employees, employers are trying to find ways to help employees with the financial burdens they and their family members may experience as a result. Generally, amounts provided by an employer to an employee are considered taxable compensation to the employee and a deductible business expense to the employer. However, when a federal qualified disaster has been declared, an employer can make qualified disaster relief payments to employees with such payments being excluded from employee income while also still being federally deductible to the employer.

Section 139 of the Internal Revenue Code generally provides that “qualified disaster relief payments” made by an employer to an employee are excluded from gross income and are not subject to any federal payroll taxes. “Qualified disaster relief payments” are generally defined as any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a “qualified disaster”, provided that such expense is not covered by insurance or otherwise compensated or reimbursable. Based on the various IRS notices delaying the April 15th due date for the filing of federal income tax returns and payments for all U.S. taxpayers, it appears the IRS has determined that COVID-19 constitutes a “qualified disaster” -- opening the door for employers to offer employees “qualified disaster relief payments” in connection with COVID-19.

Section 139 does not impose limits on qualified disaster payments that employers can make to employees. However, any payment to replace wages or salary does not qualify under this section. Qualified disaster payments are not required to be reported or disclosed by employers or employees (either via a Form W-2 or 1099) and they are not subject to federal tax withholding obligations.

*Anchin Observation: Although section 139 does not contain specific plan document requirements or the requirement that an employer maintain a written plan document, application or certification process, it is recommended that employers at least consider adopting a formal written plan document.

In addition to traditional Small Business Association (SBA) funding programs, the CARES Act established several new temporary programs to address the COVID-19 pandemic.

  • Paycheck Protection Program (PPP). This loan program provides loan forgiveness for retaining employees by temporarily expanding the traditional SBA 7(a) loan program.
  • EIDL Loan Advance. This loan advance will provide up to $10,000 of economic relief to businesses that are currently experiencing temporary difficulties.
  • SBA Express Bridge Loans. Enables small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly.
  • SBA Debt Relief. The SBA is providing a financial reprieve to small businesses during the COVID-19 pandemic.

Please use the link below for more information on each of the above options.

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options

PLUS:  Additional updates can be found at our Anchin COVID-19 Update Center.

Modifications Related to Charitable Contributions

The CARES Act allows individual taxpayers who do not itemize their deductions a permanent above-the-line charitable contribution deduction for up to $300 of cash contributions to public charities or certain foundations beginning in 2020. Note that contributions to non-operating private foundations, supporting organizations and donor advised funds do not qualify for this deduction.

The CARES Act also suspends the 60% adjusted gross income (AGI) limitation for charitable contributions by individuals in 2020 and allows those individuals who itemize their deductions to deduct up to 100% (as compared to 60%) of their AGI for certain cash contributions.  For corporations, the 10% taxable income limitation on charitable contribution deductions is increased to 25% as long as the contribution is made in cash in 2020 to a public charity or certain foundations. Donations to non-operating private foundations, supporting organizations and donor advised funds do not qualify for this increased deduction. In addition to the increase in the limitation for deductions of cash contributions, the limitation for deductions of contributions of food inventory by a corporation is also increased from 15% to 25%.

Tax filing and Tax Payment Deadlines Extended

Various recently-issued IRS notices provide that any person with certain Federal tax payment obligations and Federal tax return and other form filing obligations, which have an original or validly extended due date falling between April 1, 2020 and July 14, 2020, now has until July 15, 2020 to make the payment or file the tax return or form. Note that any deadline that expired before April 1, 2020 is not covered. The relief is automatic; taxpayers do not have to call the IRS or file any extension request or other document with the IRS. Also, the period beginning on April 1, 2020 and ending on July 15, 2020 will be free of the imposition of any interest, penalty, or addition to tax, for failure to file a return or form, or failure to make any payment on any of the referenced tax returns and forms in the notices.

The IRS recently provided “Filing and Payment Deadlines Questions and Answers” on Notice 2020-18 and is currently revising them in relation to the subsequent Notice 2020-20 and Notice 2020-23.

https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers

*Caution: While the above filing deadlines and payment dates have been deferred at the federal level, state filing deadlines or payment dates must be deferred at the state level. These deadlines may differ between the state and federal level or between individual states, and taxpayers will need to continue to monitor any changes.

For further state details, please visit the AICPA website on State Filings for the Coronavirus Pandemic:

https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf

CARES Act Creates Temporary Special Rules for Retirement Funds in 2020

The CARES Act contains several provisions that affect employee benefits as follows:

  • Allows plans to offer early coronavirus-related distributions up to $100,000 with these distributions being taken into income over three years (unless the taxpayer elects otherwise). These distributions are also not subject to the 10% additional tax for withdrawal before age 59 ½.  To qualify, the distribution must be taken during 2020, and the participant must (1) have been diagnosed or have a spouse or dependent who was diagnosed with COVID-19, or (2) have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, unable to work due to lack of child care, experiencing a closing or reduction of hours of a business owned by the individual, or other factors determined by the Secretary of the Treasury. The taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. 
  • Increases the limit on loans from qualified employer plans from $50,000 to $100,000 if the individual is a qualified individual -- meaning someone who meets the requirements for a coronavirus-related distribution, as described above.  In addition, the CARES Act delays by one year the deadline for qualified individuals to make loan repayments that are otherwise due between the date of enactment and December 31, 2020.
  • Waives the required minimum distributions (RMD) requirements for certain taxpayers that would otherwise have to be paid for calendar year 2020. The waiver would generally apply to RMDs from section 401(a), 403(a), 403(b), and governmental 457(b) plans (in each case defined contribution plans only) and IRAs.
  • For those with defined benefit plans and funding requirements for 2020, including quarterly contributions, those may be deferred until January 1, 2021. At that time, they must be paid with interest for the deferral period. For purposes of determining the plan’s benefit restrictions that occur in a plan year with dates during calendar year 2020, a plan sponsor may elect to apply the plan’s 2019 funding status.

*Anchin Observation: As referenced above relating to RMD requirements, for the year 2020 only, you do not need to receive such a distribution.  This is true for all retirement plans, whether it was originally your own or if you inherited it from someone else.   If you have alternative sources of funds you should consider not taking your required minimum distribution during 2020. Because the law did not change until March, it’s possible that you received a taxable distribution earlier this year strictly because it appeared to be mandatory at the time.  While recent legislation does not provide a method for “reversing” such a distribution, there may be an alternative:  you are free to redeposit (“roll over”) the funds into an Individual Retirement Account (IRA) within sixty days of the distribution, as long as you have not completed a similar rollover within the past year.  It does not matter if the funds are redeposited into the original retirement account or into another one.

We stand ready to help you plan effectively and to navigate through these new rules, planning opportunities and reporting requirements. In the meantime, we will continue to update you as more information becomes available as our Anchin COVID-19 Resource Team monitors the ongoing flow of clarifications and additional guidance from the Treasury and other governmental agencies. Please contact your Anchin Relationship Partner for additional information or contact us at COVID19@anchin.com.

Disclaimer: Please note this is based on the information that is currently available and is subject to change.

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