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Guidance for Retirement Plan Loans under the CARES ACT

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The Internal Revenue Service today released Notice 2020-50 (PDF) to help retirement plan participants affected by the COVID-19 coronavirus take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. This includes expanding the categories of individuals eligible for these types of distributions and loans (referred to as “qualified individuals”) and providing helpful guidance and examples on how qualified individuals will reflect the tax treatment of these distributions and loans on their federal income tax filings.

The CARES Act provides that qualified individuals may treat as coronavirus-related distributions up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1 and December 30, 2020. A coronavirus-related distribution is not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27 through December 31, 2020, and the dollar limit on loans made between March 27 and September 22, 2020, is raised from $50,000 to $100,000.

As authorized under the CARES Act, Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member. As expanded under Notice 2020-50, a qualified individual is anyone who –

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
     
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s 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;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

Notice 2020-50 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed. The guidance clarifies that administrators can rely on an individual’s certification that the individual is a qualified individual (and provides a sample certification), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment. Further, Notice 2020-50 provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.

Employers, financial institutions, and individuals should refer to Notice 2020-50 for more details about how the CARES Act rules for coronavirus-related distributions and loans from plans apply.

This tax relief and other information related to the effects of COVID-19 on federal income tax is available on the IRS Coronavirus Tax Relief pages of IRS.gov.

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1040-x AMENDED RETURNS GO ELECTRONIC

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The Internal Revenue Service announced today that later this summer taxpayers will for the first time be able to file their Form 1040-X, Amended U.S Individual Income Tax Return, electronically using available tax software products.

Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years. It’s also been an ongoing request from the nation’s tax professional community.

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form.

“This new process is a major milestone for the IRS, and it follows hard work by people across the agency,” said IRS Commissioner Chuck Rettig. “E-filing has been one of the great success stories of the IRS, and more than 90 percent of taxpayers use it routinely. But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process. Our teams have worked diligently to overcome the unique challenges related to the 1040-X, and we look forward to offering this new service this summer.”

About 3 million Forms 1040-X are filed by taxpayers each year. The new electronic filing option will provide the IRS with more complete and accurate data in an easily readable format to enable customer service representatives to answer taxpayers’ questions. Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their electronically-filed 1040-X.

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.

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why economic impact payments could be different than anticipated

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The IRS has posted information on their website giving various scenarios that explain why the Economic Impact Payment (EIP) that was received may be different than the amount that was expected.

2019 tax return not yet filed, or IRS has not finished processing the 2019 return. Payments are automatic for eligible people who filed a tax return for 2018 or 2019. Typically, the IRS uses information from the 2019 tax return to calculate the Economic Impact Payment. Instead, the IRS will use the 2018 return if the taxpayer has not yet filed for 2019. If a taxpayer has already filed for 2019, the IRS will still use the 2018 return if the IRS has not finished processing the 2019 return. The IRS accepting a tax return electronically is different than completing processing. Any issues with the 2019 return mean the IRS would have used the 2018 return to calculate the Economic Impact Payment.

If the IRS used the 2018 return, various life changes in 2019 would not be reflected in the payment. These may include higher or lower income or birth or adoption of a child. In many cases, however, these taxpayers may be able to claim an additional amount on the 2020 tax return when it is filed in 2021. This could include up to an additional $500 for each qualifying child not reflected in their Economic Impact Payment.

Claimed dependents are not eligible for an additional $500 payment. Only children eligible for the Child Tax Credit qualify for the additional payment of up to $500 per child. To claim the Child Tax Credit, the taxpayer generally must be related to the child, live with them more than half the year and provide at least half of their support. Besides their own children, adopted children and foster children, eligible children can include the taxpayer’s younger siblings, grandchildren, nieces and nephews if they can be claimed as dependents. In addition, any qualifying child must be a U.S. citizen, permanent resident or other qualifying resident alien. The child must also be under the age of 17 at the end of the year for the tax return on which the IRS bases the payment determination.

A qualifying child must have a valid Social Security Number (SSN) or an Adoption Taxpayer Identification Number (ATIN). A child with an Individual Taxpayer Identification Number (ITIN) is not eligible for an additional payment.

Parents who are not married to each other and do not file a joint return cannot both claim their qualifying child as a dependent. The parent who claimed the child on their 2019 return may have received an additional Economic Impact Payment for their qualifying child. When the parent who did not receive an additional payment files a 2020 tax return, they may be able to claim up to an additional $500 per-child amount on that return if they qualify to claim the child as their qualifying child for 2020.

Dependents are college students. Dependent college students do not qualify for an EIP, and even though their parents may claim them as dependents, they normally do not qualify for the additional $500 payment. For example, a 20-year-old full-time college student claimed as a dependent on his or her parent’s 2019 federal income tax return is not eligible for a $1,200 Economic Impact Payment. In addition, the student’s parents will not receive an additional $500 Economic Impact Payment because the student does not qualify as a child younger than 17. This scenario could also apply if the parent’s 2019 tax return hasn’t been processed yet by the IRS before the payments were calculated, and a college student was claimed on a 2018 tax return.

Furthermore, the parent cannot voluntarily relinquish claiming the student on their return for the purpose of allowing the student to file a return to receive an EIP. If the IRS determines the student is not financially independent of the parents, the student will not be eligible for an EIP.

However, if the student cannot be claimed as a dependent by his or her parents or anyone else for 2020 because they are financially independent, that student may be eligible to claim a $1,200 credit on his or her own 2020 tax return.

Claimed dependents are parents or relatives, age 17 or older. If a taxpayer claimed a parent or any other relative age 17 or older on his or her tax return, the dependent will not receive a $1,200 payment. In addition, the taxpayer will not receive an additional $500 payment because the parent or other relative is not a qualifying child under age 17.

However, if the parent or other relative cannot be claimed as a dependent on the taxpayer’s or anyone else’s return for 2020, the parent or relative may be eligible to individually claim a $1,200 credit on his or her 2020 tax return.

Past-due child support was deducted from the payment. The Economic Impact Payment is offset only by past-due child support. The Bureau of the Fiscal Service will send the taxpayer a notice if an offset occurs.

For taxpayers who are married filing jointly and filed an injured spouse claim with their 2019 tax return (or 2018 tax return if they haven’t filed the 2019 tax return), half of the total payment will be sent to each spouse. Only the payment of the spouse who owes past-due child support should be offset.

The IRS is aware that a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) may have been offset by the injured spouse’s past-due child support. The IRS is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve this issue as quickly as possible. If an injured spouse claim was filed with the return and the taxpayer is impacted by this issue, the taxpayer does not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved.

Garnishments by creditors reduced the payment amount. Federal tax refunds, including the Economic Impact Payment, are not protected from garnishment by creditors by federal law once the proceeds are deposited into a taxpayer’s bank account.

What if the amount of the Economic Impact Payment is incorrect? In many instances, eligible taxpayers who received a smaller-than-expected Economic Impact Payment (EIP) may qualify to receive an additional amount when they file their 2020 federal income tax return. EIPs are technically an advance payment of a new temporary tax credit that eligible taxpayers can claim on their 2020 return. Everyone should keep for their records the letter they receive by mail within a few weeks after their payment is issued.

When taxpayers file their 2020 tax return, they can claim additional credits if they are eligible for them. The EIP will not reduce a taxpayer’s refund or increase the amount they owe on the 2020 tax return. It is also not taxable on the 2020 return.

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PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS

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The Small Business Administration (SBA), in consultation with the Department of the Treasury, has released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions for the application. The form and instructions inform borrowers how to apply for forgiveness of their PPP loans, consistent with the CARES Act. SBA will also issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.

The form and instructions include several measures to reduce compliance burdens and simplify the process for borrowers, including:
• Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles,
• Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan,
• Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness,
• Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30, 2020, and
• Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.

The PPP was created by the CARES Act to provide forgivable loans to eligible small businesses to keep American workers on the payroll during the COVID-19 pandemic. The documents released by SBA are designed to help small businesses seek forgiveness at the conclusion of the eight week covered period, which begins with the disbursement of their loans.

Go to the following link to view the application and instructions:
https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness- Application.pdf

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IRS Postpones filing and payment dates until july15, 2020

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The IRS has now extended the deadline for filing and paying federal income tax. The due date for any taxpayer with a federal income tax payment or a federal income tax return due April 15, 2020 is automatically postponed to July 15, 2020. Taxpayers do not have to file Forms 4868 or 7004. There is no limitation on the amount of the payment that may be postponed. (This is a change from a previous announcement.) Any taxpayer refers to an individual, a trust, estate, partnership, association, company, or corporation.

The relief provided for in this notice is available solely with respect to federal income tax payments (including payments of tax on self-employment income) and federal income tax returns due on April 15, 2020, in respect of a taxpayer’s 2019 tax year, and federal estimated income tax payments (including payments of tax on self-employment income) due on April 15, 2020, for a taxpayer’s 2020 tax year.

No extension is provided for the payment or deposit of any other type of federal tax, or for the filing of any federal information return.
As a result of extending the deadline for filing and paying federal income taxes, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the federal income tax returns or to pay the federal income taxes postponed by this notice.

Notice 2020-18 supersedes Notice 2020-17, which had previously limited the amount of federal income tax payments that could be extended. Notice 2020-18 has no limit on the amount of federal income tax payments that may be postponed until July 15, 2020.

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