Here are some of the most significant changes, with suggested year-end tax planning moves for 2020, assuming the proposals are enacted.
Ideas and information about planning for your family’s financial future
The U.S. Supreme Court has agreed to hear California v. Texas (U.S. Supreme Court Docket 19-840.) This case challenges the constitutionality of the Affordable Care Act, nicknamed Obamacare.
If the Supreme Court rules the Affordable Care Act to be unconstitutional, taxes and penalties enacted as part of the Act could be eliminated and taxpayers could apply for refunds of those taxes. These include an extra 0.9% Medicare tax and the 3.8% net investment income tax.
Consider sending a protective claim to the IRS by July 15, 2020 for the tax year 2016. Spidell Publishing has posted a suggested simple form for a claim. Here is a URL for the form. http://www.mmsend63.com/link.cfm?r=4MGaSk-8do9OSq5rWJozRA~~&pe=MLxUYHWRMJTah2hlVsRhufQV3c6p4SCiez5_l6NGi1-_VLwkya4_xaxcLOOmNGM5Qkg_z_cN4pc5N38k-Y3xTA~~&t=QIJYj7V5qtg-xGkCJ-dZlw~~
You might remember the Supreme Court previously upheld the Affordable Care Act as constitutional during 2012 in National Federation of Independent Businesses v. Sebelius, because the penalties enacted in that Act to enforce the Mandate that everyone have medical insurance were considered to be taxes and Congress has the power to levy taxes under the U.S. Constitution.
One of the provisions of the Tax Cuts and Jobs Act of 2017 was to change the penalty rate to zero.
The Fifth Circuit Court of Appeals ruled on December 18, 2019 that since the “tax” for the Mandate no longer applies, the Mandate is unconstitutional, and so is the Affordable Care Act.
California and other states are contesting the decision of the Fifth Circuit Circuit Court of Appeals.
This is a last-minute development. Personally, I question whether the U.S. Supreme Court would retroactively strike down the Affordable Care Act when they previously upheld it and the penalty “tax” applied before 2019. But I could be wrong. If you don’t file a protective claim and the U.S. Supreme Court rules Obamacare was unconstitutional during 2016, you won’t be able to recover the taxes for that year.
Tax return preparers are probably already occupied with finishing 2019 income tax returns and extensions for the July 15, 2020 deadline.
If you paid these taxes and can get through to your tax advisor, discuss this matter with her or him.
The CARES Act, enacted on March 27, 2020, includes relief measures relating to retirement account distributions, including waiving the penalties for certain early distributions from retirement accounts, recontributions of distributions, deferring income taxation of distributions, and increasing the limits for plan loans.
The IRS has issued details of how the relief measures will work in Notice 2020-50. Here’s a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-50.pdf
Here are the requirements for an individual who would otherwise be subject to the early distribution penalty (usually under age 59 1/2) to qualify for the relief:
- Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
- Spouse or dependent diagnosed with COVID-19; OR
- Who experiences adverse financial consequences as a result of: (1) the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (2) the individual being unable to work due to lack of childcare due to COVID-19, or (3) closing or reducing hours of a business owned or operated by the individual due to COVID-19.
The IRS also extends relief to an individual who experiences adverse financial consequences as a result of:
- the individual having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
- the individual’s spouse or a member of the individual’s household (shares the same principal residence) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
- closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A coronavirus-related distribution is any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual. An individual can receive a maximum of $100,000 of coronavirus-related distributions. Any distributions beyond the $100,000 limit won’t qualify for relief.
The distribution can be used for any purpose.
A beneficiary of an inherited retirement account doesn’t qualify for relief, because beneficiaries aren’t subject to the early distribution penalty.
Certification to plan administrator
The Notice includes a sample certification to the plan administrator that a distribution qualifies as a coronavirus-related distribution. The plan administrator can rely on the certification unless the administrator is aware of facts to the contrary, such as more than $100,000 of distributions have been received by the plan participant.
The certification is for the plan administrator. The individual isn’t bound by the certification for income tax reporting.
Employer plans must be amended to make a qualifying distribution
Employer plans can only make these distributions if they are permitted by the plan document. The plan document will probably have to be amended to be able to make them. For most plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2022. For government plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2024.
Some plans, such as annuity type retirement plans, don’t qualify to make early distributions. 401(k) plans usually can qualify. See your tax advisor for details.
The payor will report the distribution on Form 1099-R. The distribution must be reported even if the qualified individual recontributes the coronavirus-rleated distribution to the same eligible retirement account in the same year. The payor may use either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099R.
Accepting recontribution of coronavirus-related distributions
Retirement plans aren’t required to accept recontributions of coronavirus-related distributions. It’s optional. The plan will have to be amended to accept them.
Income inclusion for coronavirus-related distributions
Individuals may elect to report coronavirus distributions (1) for the year of distribution or (2) ratably over three years, starting with the year of distribution. The election can’t be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution. The individual must treat all of the qualifying distributions for the year using the same method.
Reporting recontributions of coronavirus-related distributions
A qualified individual is permitted at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution to recontribute any portion of the distribution, up to the total amount, to an eligible retirement plan. The distribution is not considered a rollover contribution, so multiple distributions during 2020 can qualify.
If a qualified individual elects to report all of the income for 2020, the recontribution will reduce the amount of the coronavirus-related distribution included in gross income for 2020. The recontribution is reported on Form 8915-E. If the recontribution is made after the due date, including extensions, for filing the income tax return for the year for distribution, the income is reduced on an amended income tax return for 2020, which will include Form 8915-E.
If a qualified individual elects to report the income over three years and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan by the due date including extensions, for a tax year in the three-year period, the amount of the recontribution will first be applied to reduce the taxable amount for that year. The individual may elect to carryover or carryback any excess amount.
For example, Mary received a $30,000 coronavirus distribution during 2020. She elected to report the income over three years. Mary files an extension for her 2021 income tax return, extending the due date to August 15, 2022. Mary recontributes $15,000 to an eligible retirement plan on August 5, 2022. Mary’s income from the coronavirus distribution for 2021 is reduced to zero. Mary may elect to reduce her income from the coronavirus distribution for either 2020 or 2022 by the excess $5,000 ($15,000 – $10,000). A reduction for 2020 would be reported on an amended income tax return. The reductions are reported using Form 8915-E.
Special rule for year of death
If an individual dies before the full taxable amount of the coronavirus distribution has been included in gross income, the remainder must be included in gross income for the taxable year that includes the date of the individual’s death.
The CARES Act includes relief for employer retirement plan loans. (California’s income tax rules don’t conform to this change.)
- The allowable loans from an employer retirement account is increased from $50,000 to $100,000, and the rule that limits the aggregate amount of loans to 50% of the employee’s vested accrued benefit is increased to 100% of the employee’s vested accrued benefit. The plan document must be amended to permit this change.
- If a qualified individual had an outstanding loan from a qualified employer plan on or after March 27, 2020, any repayment for the loan due during the period from March 27, 2020 through December 31, 2020 is delayed for one year. The term of the loan may be extended by up to one year. Any subsequent repayments are adjusted to reflect the delay and the period of delay is disregarded in determining the 5-year period and term of the loan. Unpaid interest is added to the loan. This rule isn’t mandatory. The employer is permitted to choose to allow this delay in loan payments.
The administrator of a qualified employer plan may rely on an individual’s certification that the individual satisfies the conditions as a qualified individual.
Nonqualified deferred compensation plans
The IRS stated that the coronavirus crisis qualifies as an unforeseen emergency, qualifying for a cancellation of a service-provider’s deferral election relating to a nonqualified deferred compensation plan. The deferral election must be cancelled, not merely postponed or otherwise delayed.
See your tax advisor
There are many special tax rules that have been enacted for 2020. This is one year that you can really benefit from meeting with a tax advisor for tax planning.
The IRS says Supplemental Security Income (SSI) and Department of Veterans Affairs (VA) beneficiaries must act by Tuesday, May 5 if they didn’t file a federal income tax return for 2018 or 2019 and they have qualifying dependents to increase their Economic Impact Payment.
$500 is added to the payment for a child that would qualify for the child tax credit.
Just go to IRS.gov and click “Non-Filers: Enter Payment Information Here.”
The Joint Committee on Taxation has issued a description of the tax provisions in the CARES Act.
Here is a URL to download the report. https://www.jct.gov/publications.html?func=startdown&id=5256
Congress passed and President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L. 116-136) on March 27, 2020.
Here is a URL to see the text of the Act. https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf
Here is a URL to the Franchise Tax Board’s FAQs relating to COVID-19 issues. https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/help-with-covid-19.html
Here are some highlights of tax provisions of the Act.
Advance tax rebates
The provision that has received the most publicity is advance tax rebates of $1,200 for single persons and $2,400 for married couples who file joint income tax returns. In addition to these amounts, $500 will be included in the advance tax rebate for each dependent child claimed by the taxpayer(s) who qualifies for the child tax credit under Internal Revenue Code Section 24.
The rebates will be mailed or electronically deposited as soon as possible by the IRS to provide relief to Americans who are suffering from the shutdown of our society to fight the coronavirus pandemic.
Not everyone will qualify. The rebates are reduced to not below zero by 5% of the taxpayer’s adjusted gross income above $150,000 for married couples filing joint returns, $112,500 for heads of households, and $75,000 for other taxpayers.
Nonresident aliens, anyone who is claimed as a dependent, estates and trusts don’t qualify for the rebate.
The IRS will make a preliminary determination based on the last income tax return filed for 2018 or 2019, or for seniors who do not file an income tax return, their social security record.
Since the IRS doesn’t have spouse and dependent information for social security recipients who don’t file a tax return, they might want to file income tax returns for 2018 or 2019 if it increase their rebate.
When the taxpayer prepares his or her 2020 federal individual income tax return, the rebate will be recomputed based on the current year facts. Any additional rebate will be allowed as a credit on the income tax return. The taxpayer gets to keep any excess of the amount received over the computed amount.
The rebate reduces the federal income tax and any amount already received by the taxpayer and is treated as an refund received in amount. The rebate isn’t taxable income. The rebate can be more than the tax before the rebate and is refundable.
Waived early withdrawal penalty for certain retirement plan distributions
Taxpayers who receive a distribution from a qualified retirement plan or an IRA before they reach age 59 1/2 are normally subject to a 10% federal early distribution penalty.
The penalty will be waived for up to $100,000 of distributions during 2020 to an individual (1) who is diagnosed with coronavirus, (2) whose spouse or dependent is diagnosed with coronavirus, or (3) who experiences financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus crisis, being unable to work due to lack of child care due to the virus, closing or reducing hours of a business owned or operated by the individual due to the virus, or other factors as determined by the IRS.
Unless the taxpayer elects out, the income from a coronavirus-related distribution will be spread ratably over a 3-taxable year period, beginning with with the distribution year (2020.)
Although these distributions won’t be eligible under the usual rules for rollovers or trustee-to-trustee transfers, corona virus-related distributions from a qualified plan or an IRA may be repaid to the qualified plan or an IRA within 3 years beginning the day after the date the distribution was received. The amount repaid will be treated as a direct trustee-to-trustee transfer within 60 days of the distribution.
Since these distributions aren’t considered to be rollovers, you can have as many distributions as you want during 2020 treated as trustee-to-trustee transfers or have them taxed over three years, provided they qualify as coronavirus-related.
Roth conversions can also be taxed over three years under the rule, provided the distribution was coronavirus related, such as if the account owner was diagnosed with a mild case of the virus.
It appears claiming the recharacterization of the distribution for any repayments will be reported on the 2020 income tax return, and the return will be amended if the distribution isn’t restored in time.
Distributions from inherited IRAs with a nonspouse beneficiary don’t qualify for rollover treatment. (IRC § 402(c)(4), (9), § 408(d)(3)(C).) (Once a distribution is received by a nonspouse beneficiary from an inherited IRA, it can’t be redeposited.)
The waiver of penalty and extended rollover provisions apply to distributions on or after January 1 and before December 31, 2020. (Evidently, distributions ON December 31, 2020 won’t qualify.)
Required minimum distributions aren’t required for 2020
The required minimum distributions that apply to defined contribution qualified retirement plans (401(k)s and profit sharing plans) and IRAs after a participant reaches age 72 (age 70 1/2 before the SECURE Act was enacted) is waived for 2020.
If an employee reached age 70 1/2 during 2019, so the employee has a required beginning date on April 1, 2020, the penalty is also waived for that payment.
For years after 2020, the required minimum distributions will be computed by the regular procedure (beginning balance divided by life expectancy) without regard to the 2020 required minimum distribution and the required beginning date will be unchanged for other income tax determination purposes.
Charitable contributions limits for individuals increased
Individuals who don’t itemize deductions on their federal income tax returns will be able to deduct on their 2020 federal income tax returns up to $300 of charitable contributions that would otherwise qualify, except for donations to a donor advised fund or a private foundation.
The limitation for itemized deductions of cash charitable contributions to public charities by individuals, normally 60% of adjusted gross income, is eliminated for 2020.
Charitable contributions limit for corporations increased
The limit for charitable contributions for C corporations is increased for charitable contributions paid in cash during calendar year 2020 to public charities from 10% of modified taxable income to 25% of modified taxable income.
Charitable contributions limit for food inventory
For noncorporate taxpayers, the limit for charitable contributions of food inventory is increased from 15% to 25% of the taxpayer’s aggregate net income for 2020 from all trades or businesses from which such contributions were made.
For C corporations, the limit for charitable contributions of food inventory is increased from 15% to 25% of modified taxable income.
Exclusion for employer payments on student loans
Effective for payments made after March 28, 2020 and before January 1, 2021, payments by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for education of the employee are excluded from the employee’s taxable income. The employee won’t be eligible to claim an interest deduction for the excluded amount.
Payroll tax credit for certain employers
Employers who have their business operations fully or partially suspended during a calendar quarter due to orders from a government authority due to the coronavirus during the period beginning with the first calendar quarter beginning after December 31, 2019 for which gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter for which gross receipts are greater than 80% of the gross receipts for the prior year and all tax-exempt organization during 2020 are eligible for an employee retention tax credit of 50% of qualified wages of up to $10,000 for each employee for all calendar quarters.
Note that employers who receive a small business interruption loan aren’t eligible for this credit. (The loan may be eligible for forgiveness, and that would be double-dipping.) If the employer claims the credit and receives a loan in a subsequent quarter, the credit will be recaptured.
The credit is effective for wages paid after March 12, 2020 and before January 1, 2021.
The credit is limited to the 6.2% employer share of social security taxes for all employees during the calendar quarter, but any credit in excess of that amount is treated as an overpayment and is refundable to the employer. (Note that medicare taxes and federal unemployment taxes aren’t eligible to be offset by the credit.)
The credit is reduced for credits allowed for employment of qualified veterans, research expenditures of qualified small businesses, and payroll tax credits for paid sick and paid family and medical leave provided in the Families First Coronavirus Response Act.
For employers having an average of more than 100 full-time employees during 2019, qualified wages means wages paid with respect to which an employee is not providing services due to a government-ordered suspension or a period of significant decline in gross receipts, but not in excess of the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period.
For employers with an average of 100 or fewer full-time employees in 2019, qualified wages means wages paid with respect to an employee during any period of a government-ordered suspension or during a quarter that is within a period of significant decline in gross receipts.
Qualified wages don’t include any amounts taken in account for payroll tax credits provided in the Families First Coronavirus Response Act.
Qualified wages includes the employer’s qualified health plan expenses properly allocable to the wages that are excluded from the gross income of employees.
Wages of employees for which a work opportunity credit is claimed aren’t eligible for the credit.
Governmental employers aren’t eligible for the credit.
Here is a URL for IRS FAQs on the Employee Retention Credit. https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Deferred payment of employer payroll taxes
Deposits of the employer portion of payroll taxes due from March 28, 2020 through December 31, 2020 are deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.
Payments for one half of self-employment tax (the “employer” portion) for 2020 are also deferred and payable 50% on December 31, 2021 and the balance on December 31, 2022.
Employers that have a loan forgiven under Section 1106 of the CARES Act for a loan under Section 7(a)(36) of the Small Business Act aren’t eligible for deferring payment of employer payroll taxes.
Net operating loss deduction and carrybacks
The 80% of taxable income limitation for deducting net operating losses has retroactively been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021. For taxable years beginning after December 31, 2020, the 80% of taxable income limitation for deducting net operating losses will be restored.
For losses arising in a taxable year beginning after December 31, 2017 and before January 1, 2021, net operating losses may be carried back 5 taxable years. Previously, net operating loss carrybacks weren’t allowed for these years.
Taxpayers may elect to waive the carryback. There is also a special election available to exclude carrybacks to one or more years that have income exclusion of offshore income under Internal Revenue Code Section 965.
Taxpayers may revoke a previous election to waive a net operating loss carryback by July 25, 2020.
Note many taxpayers should consider filing amended returns to claim net operating loss carrybacks from 2017, 2018. and 2019.
Excess business loss limitations suspended
The limitations on deductions for business losses in excess of business income have been suspended for taxable years beginning after December 31, 2017 and before January 1, 2021.
Since these losses will now be allowed, taxpayers who are entitled to them should file amended income tax returns to claim them.
Tax credit for prior year minimum tax liability of C corporations
The alternative minimum tax was repealed for C corporations by the Tax Cuts and Jobs Act of 2017. Unused minimum tax credits were scheduled to be refundable with an annual 50% limitation for taxable years beginning in 2018, 2019, and 2020 until a 100% limitation would be applied for taxable years beginning in 2021.
Under the CARES Act, taxpayers may elect to claim a refundable credit for 100% of the balance for taxable years beginning in 2018 or 2019.
The election to claim the 100% limit for 2018 can be made using an application of tentative refund form (Form 1139.) The form should be filed by December 31, 2020. The IRS should issue the refund within 90 days after receiving the form.
Increased limit on deduction for business interest
Certain taxpayers that have more than $25 million of business income or are “tax shelters” are subject to a limitation for deducting business interest expenses.
Under the Tax Cuts and Jobs Act of 2017, the limit is the sum of (1) business interest income of the taxpayer for the tax year; (2) 30% of the taxpayer’s adjusted taxable income for the year; and (3) floor plan financing interest of the taxpayer for tax year.
Under the CARES Act, the limitation of item (2) is increased to 50% for taxable years beginning in 2019 and 2020.
Technical correction for Qualified Improvement Property
Qualified improvement property is an improvement to an interior portion of a building that is nonresidential real property provided the improvement is placed in service after the date the building was first placed in service. Improvements relating to the enlargement of a building, an elevator or escalator, or the internal structural framework of the building aren’t qualified improvement property.
This is the expanded definition of qualified improvement property adopted in the Tax Cuts and Jobs Act of 2017.
A drafting error in the Tax Cuts and Jobs Act of 2017 made the property subject to a 39 year depreciable life and not eligible for 100% bonus depreciation.
The CARES Act includes a technical correction defining qualified improvement property as 15 year property, qualifying for bonus depreciation. This correction is retroactive to the date of enactment of the Tax Cuts and Jobs Act of 2017, which was December 20, 2017.
Even with this technical correction, some taxpayers won’t qualify for bonus depreciation for this property. Taxpayers that are otherwise subject to the limitation for business interest deductions under Internal Revenue Code Section 163(j) (generally they have average annual gross receipts for the three prior years of $26 million for tax years beginning in 2020) and make elections to be excluded from the limitations, notably electing real property trade or businesses, electing farming businesses, and certain infrastructure trades or businesses, must used the alternative depreciation system instead of the modified accelerated depreciation system. For these businesses, depreciable real estate has a useful life of 39 years, so they don’t qualify for bonus depreciation on qualified improvement property.
Taxpayers with commercial buildings that had qualified improvement property placed in service after 2017 should amend their 2017, 2018 and 2019 income tax returns to claim bonus depreciation for the year the property was placed in service.
Government loan guarantees for small businesses
In addition to the tax provisions discussed above and many other matters, the legislation includes a “Paycheck Protection Program.” The Federal government will 100% guarantee SBA administered loans to businesses with not more than 500 employees. Sole proprietors, independent contractors and other self-employed individuals are eligible for loans. The covered loan period begins February 15, 2020 and ends on June 30, 2020.
There is an issue about whether self-employment compensation for partners in partnerships and members of LLC taxed as partnerships can be included in wages for Paycheck Protection Program loans. They aren’t specifically listed.
Act Section 1102(a)(1)(viii)(I)(bb) includes income of a sole proprietor or independent contractor that is a wage, commission,income, net earnings from self-employment, or similar compensation and that is an amount that is not more than $100,000 in 1 year, as prorated for the covered person…”
The SBA “Interim Final Rules” II. 3. f. says payroll costs include “… for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.”
Based on these definitions, it seems that it was intended that compensation of self-employed persons, including LLC members, should be covered by the Paycheck Protection Program. In a recent CalCPA webinar, CPAs from Armanino suggested that guaranteed payments in lieu of wages should be included in payroll for the loan application. Since the definition in the Act is “self-employment income”, it seems to me that all self employment income should be included. Guaranteed payments in lieu of wages should be increased or decreased for the partner’s or member’s share of self-employment income or losses from the partnership or LLC.
When you include this item in wages, you should probably explain what you are doing and why.
This legislation was drafted in a hurry, and whoever wrote it wasn’t thinking about partnerships and LLCs.
The maximum loan amount is $10 million through December 31, 2020. The loan amount is based on payroll costs incurred by the business.
Uses of the loan include payroll support, such as employee salaries (subject to a $100,000 limitation for an employee’s wages), paid sick or medical leave, insurance premiums and mortgage interest, rent, and utility payments.
Only compensation of persons whose principal place of residence is in the United States are covered.
Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes and income taxes required to be withheld from employees, are excluded.
Qualified sick and family leave wages for which a credit allowed under the Families First Coronavirus Response Act (Public Law 116-126) are also excluded. (No double dipping!)
Eligibility is based on whether a business was operational on February 15, 2020 and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor.
The Act waives borrower and lender fees for particpating in the Paycheck Protection Program, and waives collateral and personal guarantee requirements under the program.
The maximum interest rate for these loans is four percent.
No loan payments will be required for at least six months and not more than a year, and requires the SBA to issue guidance about the deferment process by April 27, 2020.
Although the stated maturity of the loans is 10 years, the principal amount of the loan is forgiven up to the amount of (1) payroll costs; (2) payments of interest on a covered mortgage obligation; (3) payments on any covered rent obligation; and (4) covered utility payments. No more than 25% of the forgiven amount can be for non-payroll costs.
The debt cancellation is tax free. (Act § 1106(i).)
Caution! I have heard that some businesses, such as registered investment advisors, may be subject to restrictions on having debt. Check with your compliance officer or attorney before going ahead with an application for an SBA loan.
Here is a URL for the application form for a Paycheck Protection Program loan. https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf?j=268557&sfmc_sub=124882304&l=3151_HTML&u=8813281&mid=7306387&jb=592&utm_medium=email&SubscriberID=124882304&utm_source=NewsUp_A20Mar225&Site=aicpa&LinkID=8813281&utm_campaign=Newsupdate&cid=email:NewsUp_A20Mar225:Newsupdate:Share+the+application:aicpa&SendID=268557&utm_content=Special
Here is a URL for a borrower’s guide for Paycheck Protection Program loan. https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf?j=268557&sfmc_sub=124882304&l=3151_HTML&u=8813282&mid=7306387&jb=592&utm_medium=email&SubscriberID=124882304&utm_source=NewsUp_A20Mar225&Site=aicpa&LinkID=8813282&utm_campaign=Newsupdate&cid=email:NewsUp_A20Mar225:Newsupdate:accompanying+borrower+guide:aicpa&SendID=268557&utm_content=Special
Here is a URL for the Small Business Administration’s interim final rule for Paycheck Protection Program loans. https://www.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL_0.pdf
Disaster loss election available
Since President Trump invoked the Robert T. Stafford Disaster Relief and Emergency Assistance Act when he declared the coronavirus outbreak to be a national emergency, disaster losses are eligible to be carried back one year under Internal Revenue Code Section 165(i) . Taxpayers should consider which tax year the losses they incur relating to the COVID-19 crisis will have the best tax benefit.
The Act includes a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payments to people who traditionally aren’t eligible for unemployment benefits, including self-employed persons, independent contractors and those with a limited work history, who are unable to work as a direct result of the coronavirus public health emergency.
Unemployment compensation benefits are increased an additional $600 per week to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
Unemployment benefits are extended an additional 13 weeks through December 31, 2020 when state unemployment benefits are no longer available.
Railroad unemployment benefits are also increased like other unemployment benefits explained above, and the 7-day waiting period for railroad unemployment insurance benefits is temporarily eliminated through December 31, 2020.
For details about how these changes affect your situation, consult with your tax advisor or write to me at email@example.com.
The IRS issued the final regulations for Qualified Opportunity Zones, TD 9889, on December 20, 2019 and they were published in the Federal Register on January 13, 2020. The final regulations are generally effective for taxable years beginning after March 13, 2020, but taxpayers may elect to apply them for taxable years beginning after December 31, 2017 (for most taxpayers, 2018 and 2019.) If taxpayers decide to rely on proposed regulations previously issued by the IRS, they must totally follow the proposed regulations — no cherry picking! Alternatively, if the final regulations are selected for 2018 and 2019, the taxpayer must solely rely on those.
Here’s a link to the regulations in the Federal Register: https://www.federalregister.gov/documents/2020/01/13/2019-27846/investing-in-qualified-opportunity-funds
The final regulations are generally more taxpayer-friendly than the proposed regulations, but there are some rules in the proposed regulations that are more favorable for some taxpayers.
My printout of the final regulations with the preamble is 543 pages. I won’t explain them in detail here, but hit a few highlights. If you are thinking of investing or have invested in a Qualified Opportunity Zone, I highly recommend that you work with a tax professional who has studied the rules.
When investing in a Qualified Opportunity Zone investment, due diligence is essential. This is the type of investment that will attract fraudsters as organizers. You won’t get the tax and investment benefits if the organizer steals your money.
Very briefly and over-simplified, the benefits of Qualified Opportunity Zone investments are: (1) Defer the taxation of capital gains until the earlier of an inclusion event (such as selling the investment) or December 31, 2026; (2) If the investment is held at least five years no later than December 31, 2026, 10% of the original gain becomes tax free; (3) If the investment is held at least seven years no later than December 31, 2026, 5% of the original gain becomes tax free; (4) If the investment is held more than 10 years, the appreciation of the investment becomes tax free. Note that (1) in order to get ALL of the tax benefits, the investment must have been made by December 31, 2019, (2) the tax on at least 85% of the deferred capital gain must be paid for the tax year that includes December 31, 2026.
Remember that states might not conform to the Qualified Opportunity Zone rules. For example, California hasn’t conformed at this time.
The Opportunity Zones are designated by the states. You can likely locate them by searching online for “Qualified Opportunity Zones” and the state. These investments are becoming available through investment advisors. Alternatively, married couples can set up their own Qualified Opportunity Zone fund, or taxpayers otherwise can join together to make these investments. (This is NOT a do-it-yourself project! Only do it with professional help!)
Here are a few comparisons of the proposed and final regulations.
Under the proposed regulations, the taxpayer had to sell the investment (corporation, LLC or partnership interest) in order to get the 100% exclusion of appreciation within the fund after holding the investment (called a Qualified Opportunity Fund or QOF) for more than 10 years. Under the final regulations, the exclusion can be claimed when the QOF sells a Qualified Opportunity Zone asset (for example, a building.)
Under the proposed regulations, a property that was abandoned or otherwise left vacant for 5 years or longer could be treated as “originally used” for the purposed of the Original Use Test. Under the final regulations, the period is reduced to 3 years or longer, or only 1 year if the property was vacant before the designation of its location as a Qualified Opportunity Zone.
In order to defer the taxation of capital gains, the gain the taxpayer wishes to defer must be invested in the QOF within 180 days after the sale.
Under the proposed regulations, gains from the sale of Section 1231 assets (business assets) had to be netted for the taxable year and only Section 1231 gains in excess of losses could be deferred and invested in QOF. Because the net gain couldn’t be determined until the end of the year, the time for the 180 day reinvestment started as of the end of the year of the sale. Under the final regulations, gains from the sale of Section 1231 assets, without regard to Section 1231 losses, can be deferred and invested in a QOF. The time for the 180 day reinvestment starts on the date of the sale. When the gain becomes taxable, it will retain its status as a Section 1231 gain.
(Note that the proposed regulations and final regulations both provide that capital gains, not reduced by capital losses, are eligible for tax deferral by reinvesting them in a QOF. The measuring date for 180 day reinvestment of capital gains is the date of the sale.)
For investors in a partnership or S corporation and for beneficiaries of estates and non-grantor trusts, called pass-through entities, the proposed regulations provided the ratable share of the capital gain from the passthrough entity could be reinvested in a QOF (1) within 180 days of the actual date of a sale or exchange by the passthrough entity, or (2) within 180 days after December 31 of the taxable year in with the gain was incurred. Since it may be some time before the information is determined after the end of the taxable year, the final regulations add a third option, (3) within 180 days after the due date, WITHOUT EXTENSIONS, of the pass-through entity’s tax return for the taxable year in which the sale or exchange took place (generally, either March 15 or April 15 of the following year.)
The final regulations provide that taxpayers may elect to have the 180-day period begin on either the date an installment sale payment is received or on the last day of the taxable year in which the taxpayer would have recognized the gain under the installment method. If the payment date is selected, the taxpayer must continue to follow that method in future years. Also, installment sale gains from sales in years before January 1, 2018 are eligible for reinvestment in a QOF and tax deferral.
The final regulations clarify that nonresident aliens may defer the tax on capital gains that would otherwise be subject to U.S. tax by investing the gains in a QOF.
Under the proposed regulations, there was an inclusion event requiring the taxation of deferred gains for all of the shareholders if a QOF organized as an S corporation had a change of ownership exceeding 25% before the holding period requirements were met. Under the final regulations, this requirement has been eliminated. Only the shareholders who transfer their shares will have an inclusion event.
You can see from these changes that taxpayers will need to determine based on their own facts which set of regulations to choose. As I write this, there is still time to defer federal income taxes by investing in a QOF for sales made late in 2019.
There are many additional provisions, including operating rules for Qualified Opportunity Zone investments, that I haven’t discussed here. Once more, see your tax advisor for details.
Legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted December 20, 2019, renders any estate plan involving a Conduit Trust beneficiary of a big retirement account (including 401(k) accounts and IRAs) obsolete.
A provision of the Act repeals “stretch” payments over the life expectancy of most successor beneficiaries for inherited retirement accounts of decedents who die after December 31, 2019. The maximum time for distributions is 10 years after the death of the decedent/plan participant.
What is a Conduit Trust? The purpose of a Conduit Trust was to control a retirement account, usually with a minor beneficiary, and still qualify for distribution of the account over the beneficiary’s life expectancy, called stretch distributions. In order to qualify, the account had to be disregarded for income tax reporting with respect to the retirement account distributions. The way this was accomplished was to require that any retirement account distributions received by the trust be immediately distributed to the beneficiary.
Since life expectancy distributions are usually very small, a huge distribution would be payable to the beneficiary 10 years after the death of the account owner, probably subject to very high federal income tax rates and possibly subject to mismanagement by the beneficiary.
There are some exceptions to the new rule, including (1) the surviving spouse of the employee/participant, (2) a child who is under age 21, (3) certain disabled persons, (4) certain chronically ill persons, and (4) an individual not previously described who is not more than 10 years younger than the employee/participant.
When a child of the decedent reaches age 21, the balance of the account must be distributed within 10 years.
If a beneficiary of a retirement account inherited from a person deceased before 2020 is deceased after 2019, the 10 year limit applies to that person’s successor beneficiaries.
Since the Conduit Trust no longer provides a tax benefit, employees/participants with retirement accounts should consult with their attorney and tax consultant about eliminating the Conduit Trust as a beneficiary and making alternative estate plans for their retirement accounts.
As part of the domestic spending bill, H.R. 1865, Further Consolidated Appropriations Act, 2020, enacted on December 20, 2019, major federal retirement changes were enacted in Division O, the Setting Every Community Up for Retirement Enhancement Act of 2019, nicknamed the SECURE Act. As part of the SECURE Act, Congress also repealed changes to the Kiddie tax enacted in the Tax Cuts and Jobs Act of 2017. Taxpayers may elect to amend their 2017 and 2018 individual income tax returns to use this Kiddie tax change.
Here are highlights. Please consult with your retirement plan consultant or tax consultant for more details.
- Effective for plan years beginning after December 31, 2020, the rules for multiple employer plans have been relaxed so that if one employer violates the qualification rules, the entire plan won’t be disqualified. (The “one bad apple rule.”)
- Effective for plan years beginning after December 31, 2019, the maximum default contribution for a plan with automatic enrollment is increased from 10% to 15%.
- Effective for taxable years beginning after December 31, 2019, the tax credit for retirement plan startup cost for small employers is increased from the lesser of (1) $500 or (2) 50% of qualified startup costs to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of nonhighly compensated employees of the employer who are eligible to participate in the plan or (b) $5,000. The credit applies for the first three years of the adoption of the plan. It’s also available for employers that convert an existing plan to an automatic enrollment design.
- Effective for taxable years beginning after December 31, 2019, amounts includable in an individual’s income paid to aid the individual in pursuing graduate or postdoctoral study, such as a fellowship, stipend, or similar amount, is treated as compensation for the limitation on IRA contributions.
- Effective for taxable years beginning after December 31, 2019, the prohibition of contributions to an IRA by an individual who has reached age 70 ½ has been repealed. The excludable amount for direct distributions to a charity after age 70 ½ is reduced by any contributions to an IRA after age 70 ½.
- Effective for plan loans made after December 20, 2019, amounts loaned from a plan using a credit card or similar arrangement will be treated as deemed plan distributions and not as loans.
- Effective for plan years beginning after December 31, 2019, when a plan will no longer accept a lifetime income option, such as an annuity, as a plan investment, employees will be able to make direct transfers of the lifetime income investment to an IRA or another retirement account within the 90-day period ending on the date when the lifetime income investment is no longer accepted by the plan.
- Effective for plan years beginning after December 31, 2020, employers are required to permit employees to make elective deferrals if the employee has worked at least 500 hours per year with the employer for three consecutive years and has met the age requirement (age 21) by the end of the three-year period. Each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service for vesting purposes. This (500 hour) requirement will not apply for collectively-bargained plans. Employers may elect to exclude these employees for the nondiscrimination and top-heavy requirements. Employer contributions won’t be required for these individuals.
- Effective for distributions made after December 31, 2019, distributions of up to $5,000 per birth or adoption can be made free of the 10% early distributions penalty during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. (An eligible adoptee is any individual, other than a child of the taxpayer’s spouse, who has not reached age 18 or is physically or mentally incapable of self-support.) Taxpayers must include the name, age, and taxpayer identification number of the child or adoptee on their tax return. The distributions may be recontributed to an individuals eligible retirement plan, subject to certain requirements.
- Effective for plan participants who reach age 72 after December 31, 2019, the age at which distributions are required to be made from an IRA or a qualified plan is increased from age 70 1/2 to age 72. (The required beginning date for employees who reached age 70 1/2 during 2019 is unchanged at April 1, 2020.) The age at which qualified charitable distributions of up to $100,000 per year from an IRA is unchanged at 70 1/2.
- Retroactively effective for plan years beginning after December 31, 2017, the actuarial rules for defined benefit plans of privately-owned community newspapers are relaxed. This is targeted relief benefiting this group.
- Retroactively effective for defined contribution plan years beginning after December 31, 2015 and effective for IRA contributions after December 20, 2019 , difficulty of care payments that are excludable from gross income are treated as compensation for nondeductible IRA contribution limits. These are payments by (1) a state or political subdivision of a state, or (2) a qualified foster care placement agency as compensation for providing additional care needed for qualified foster individuals. The payments are provided when a qualified foster individual has a physical, mental or emotional disability for which the state has determined (1) there is a need for additional compensation to care for the individual; (2) The care is provided in the home of the foster care provider; and (3) the payments are designated by the payor as compensation for that purpose.
- Effective for taxable years beginning after December 31, 2019, an employer may adopt a qualified retirement plan up to the extended due date of the employer’s federal income tax return and the plan can be retroactively effective for the taxable year. Although employee contributions can’t be made after the year-end, employer contributions can be made up to the extended due date of the income tax return. (This rule currently applies to SEP accounts.)
- Effective for plan years beginning after December 31, 2021, the IRS is to issue procedures for employers who have similar individual account or defined contribution accounts to elect to file combined annual reports (Form 5500.)
- The IRS is to issue model disclosures showing the estimated lifetime income based on the account balance of a plan participant, to be reported at least annually. The IRS is also required to provide guidelines for how the income amount should be computed.
- A fiduciary safe harbor is adopted so plan fiduciaries will satisfy the prudence requirement when selecting an insurer for a guaranteed retirement income (annuity) contract and will be protected from liability for losses that result to to participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the contract. (A favorable provision for insurers, not so great for participants and beneficiaries.)
- Effective on December 20, 2019, and electively retroactive to plan years beginning after December 31, 2013, the nondiscrimination rules are modified to protect older, longer service participation. These rules are complex and beyond the scope of this explanation. The rules will allow a closed or frozen plan to continue in existence.
- Effective for distributions made after December 31, 2018, from Section 529 (educational savings) plans, registered apprenticeship expenses will be considered “qualified higher education expenses.” Expenses for fees, books, supplies and equipment required for the designated beneficiary to participate in a registered apprenticeship program are qualified expenses for distributions from such a plan.
- Effective for distributions made after December 31, 2018, up to $10,000 of qualified education loan repayments will be considered “qualified higher education expenses” for distributions from a Section 529 plan. Student loan interest paid using distributions from a Section 529 plan won’t otherwise qualify for a tax deduction.
- Effective for distributions made with respect to employees or plan participants who die after December 31, 2019, inherited retirement accounts must generally be distributed within 10 years after the employee or participant’s death. There is an exception permitting “stretch” distributions based on life expectancy to (1) the surviving spouse of the employee/participant, (2) a child of the employee/participant who hasn’t reached majority, (3) certain disabled beneficiaries, (4) chronically ill beneficiaries, or (4) other beneficiaries who are not more than 10 years younger than the employee. Once a child of the employee/participant reaches majority, the balance of the account must be distributed within 10 years after the date majority is reached.
The effective date for collective bargaining agreements and government plans will generally be for distributions with respect to employees or plan participants who die after December 31, 2021.
There is an exception for certain existing annuity contracts.
The ten-year distribution requirement also applies to successor beneficiaries of beneficiaries who inherited accounts before December 20, 2019. (If an employee/participant was deceased during 2019, a surviving spouse might decide to disclaim IRA survivor benefits so that successor beneficiaries will be able to claim “stretch” distributions of benefits for which the election would otherwise be lost.)
Commenters have suggested designating a charitable remainder trust as a beneficiary of a retirement account as a way to avoid the 10-year limit. The plan distribution to the trust isn’t subject to current taxation. Distributions are required to be made annually to the beneficiary(ies) of the CRT, which will probably carry taxable income. Depending on how long the beneficiary(ies) live, some or all of the balance could go to a charity. Seek tax and legal counsel when considering this alternative.
- A provision of the Tax Cuts and Jobs Act of 2017 changed the Kiddie Tax that apples to the unearned income of certain individuals. The rule applies to a child who (1) is required to file a tax return; (2) does not file a joint income tax return for the tax year; (3) the child’s investment income exceeds a threshold ($2,200 for 2019); (4) either of the child’s parents are alive at the end of the year; and (5) At the end of the tax year, the child is either (a) under age 18; (b) under age 19 and doesn’t provide more than half of his or her own support with earned income; or (c) under age 24, a full-time student, and does not provide more than half of his or her own support with earned income. Under the Tax Cuts and Jobs Act, the child’s income tax is computed using the tax rate schedule that applies to estates and trusts. This provision was causing a hardship, especially for survivors of military casualties. Under the SECURE Act, this change is repealed, effective for tax years beginning after December 31, 2019. Taxpayers may elect to retroactively apply the change for tax years 2018 and 2019. This means children will generally be taxed on their unearned income at their parent’s marginal tax rate. For 2019, the 37% marginal tax rate applies for single persons with taxable income over $510,300 and for estates and trusts with taxable income over $12,750.
(Note – The IRS issued final regulations superceding the proposed regulations discussed below. The effective date was changed to required minimum distributions for years beginning on or after January 1, 2022 and the new life expectancy tables changed slightly. See TD 9930.)
The IRS has issued proposed regulations relating to required minimum distributions from retirement accounts, including, 401(k), IRA and Roth IRA accounts. (Proposed Regulations REG-132210-18, Proposed Regulations Section 1.401(a)(9)-9.)
The required minimum distribution is generally computed using a life expectancy table issued by the IRS, called the lifetime distribution table. The life expectancy tables haven’t been updated for many years. The proposed regulations include new life expectancy tables.
(If a taxpayer fails to take a required minimum distribution, the federal penalty is 50% of the undistributed amount.)
Since life expectancies have been increasing, required minimum distributions will be smaller using the proposed tables, potentially leaving larger balances to accumulate future earnings. Bigger distributions can optionally be taken at the risk of exhausting the account before the employee or plan owner’s death.
The proposed regulations are proposed to be effective for retirement plan distributions for tax years beginning on or after January 1, 2021, provided they are adopted as final regulations by that date.
Required minimum distributions for a non-spouse beneficiary of a deceased employee or a deceased plan owner are based on the life expectancy determined using the Single Life Table of the beneficiary as of the date of death of the employee or plan owner, minus one for each subsequent year. Under the proposed regulations, the beneficiary will be able to recompute his or her life expectancy as of the date of death of the employee or deceased plan owner using the new lifetime distribution table starting January 1, 2021.