Top 5 Legislative Changes That Could Affect Your Tax Filings This Year
The legislative changes we’ve seen so far this year have been record-breaking. The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act were signed in March and made significant changes to tax and employment law for American individuals and businesses. These rulings, along with state and local laws, have changed the 2020 tax season in many ways. Below are five of the changes you should keep an eye on.
1. New Filing Deadline
The CARES Act gives individuals and C corporations an additional three months to file their tax returns this year. The famed April 15 deadline got pushed back to July 15, 2020, for individuals filing Form 1040 and corporations filing Form 1120. Although the deadline for filing partnership and S corporation returns (Forms 1065 and 1120-S, respectively) did not change, the income and expenses that flow through using Forms K-1 need not be reported on individuals’ tax returns until July 15, 2020.
When the April 15 deadline was extended, so was the deadline for taxpayers to make contributions into their Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs) for the 2019 calendar year. Typically, taxpayers can contribute to their IRAs, HSAs, and Archer MSAs through April 15 to be counted as prior-year contributions. This year, the 2019 contribution deadline was extended to July 15, 2020.
2. New Payment Deadline
When the filing and contribution deadlines got pushed back, so did the requirement to pay taxes. Almost all tax payments that would have been due between April 15, 2020, and July 15, 2020, were pushed back to July 15, 2020. This includes:
- Remaining tax due for the 2019 tax year (originally due April 15, 2020)
- First-quarter estimated taxes for the 2020 tax year (originally due April 15, 2020)
- Second-quarter estimated taxes for the 2020 tax year (originally due June 15, 2020)
If these payments are made by July 15, 2020, they will be deemed to have been made timely, and the IRS will not assess late payment or underpayment penalties or interest. Not all states have conformed to this schedule, so check with your advisor if you have any concerns.
3. Tax Homes
When the coronavirus outbreak hit, companies all over the nation asked their employees to work remotely, and many were forced to work from their out-of-state home offices. Businesses were unsure how to source those employees’ wages: should they be sourced to the employees’ home states or the business’s state of operation?
For income and payroll tax purposes, most states source wages to the state where the work is performed, but the coronavirus outbreak may be an exception. New Jersey, for instance, provides temporary relief from performance-based wage sourcing. During the COVID-19 pandemic, wages will continue to be sourced to the employer’s jurisdiction whether the employee is working within or outside of New Jersey. Individuals can comply with this sourcing allocation or use their allocation when reporting resident and nonresident income on their returns. Still, they should be prepared to submit documentation that supports their decision if requested.
New York is a different animal. New York’s convenience of the employer rule allows them to tax income earned by out-of-state employees working for a New York business, whether they commute into the state or work from home. If an employee works for a New York business but was asked to telework from their home in Connecticut or New Jersey, their income will continue to be sourced to New York. The employer test’s convenience was in place before the pandemic, so COVID-19-related work-from-home assignments will not change New York’s income sourcing philosophy.
Each state has its sourcing rules, so businesses with employees working outside of the tristate area will need to review those states’ laws to determine their employees’ income tax homes.
4. Accelerated Disaster Losses
On March 13, 2020, The White House declared the coronavirus outbreak to be a National Emergency. This classification allowed taxpayers to accelerate coronavirus-related loss deductions. By making an election under Internal Revenue Code Section 165(i), taxpayers can deduct 2020 disaster losses on their 2019 tax returns.
Not all business losses will qualify as disaster losses under Section 165(i), but many will. Losses that can be attributed to COVID-19 disruptions include:
- Store closures
- Disposal of inventory at a loss
- Retirement of fixed assets
- Abandonment of pending transactions
- Losses on marketable securities
- Losses on property sales
- Costs incurred to cancel contracts
- Costs for licensure lapses
- Prepayments that cannot be refunded
Losses that do not qualify for the accelerated loss treatment include lost revenues and a decline in value of unsold property due to the recession.
Taxpayers that had considerable taxable income in 2019 and have realized any of the above COVID-19 related losses after March 13, 2020, should consider deducting those disaster losses on their 2019 tax returns. Taxpayers can make the election to accelerate disaster losses by filing Form 4684, Casualties and Thefts, with their 2019 return. If they have already filed their 2019 returns, they can amend their return as long as they file Form 4684 no later than six months after the due date for filing their 2019 tax return (without regard to extensions).
5. Work-At-Home Fringe Benefits
To support employees as they work from home, many employers provided their workers with computers, additional monitors, office supplies, and similar items to help make their work-from-home experience successful. The IRS is likely to treat these expenses as nontaxable fringe benefits because they are provided in the ordinary course of business, whether the employee is at home or in the office. When businesses give allowances to their workers for cell phone usage, faster internet, or additional electricity or heating bills, the answer may change.
The determination of whether fringe benefits are taxable is based on the facts and circumstances of each scenario, and under COVID-19 circumstances, the IRS would likely consider the following:
- Whether working from home was mandated by the employer
- Whether the at-home assignments are temporary
- Whether the requirement to work from home was due to a state or local ordinance
Employers who want more certainty may instead designate these expenses as “qualified disaster relief payments.” Qualified disaster relief payments are excluded from employees’ incomes and deductible by the employer. When the White House declared the coronavirus outbreak to be a national emergency, it opened the door for these types of expenses to qualify.
Under this program, employers can reimburse personal expenses or provide lump-sum amounts to employees to cover work-from-home expenses. Employers can make qualified disaster relief payments related to COVID-19 until President Trump removes the emergency designation.
If you have any questions regarding the information above and their implications, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The material in this post is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.