IRS discusses tax implications of COVID-19 legislation

BVWireIssue #211-2
April 8, 2020

federal taxation
internal revenue service (IRS), net operating loss, coronavirus, COVID-19

In an excellent ABA webinar that summarized and analyzed the COVID-19-related legislation Congress passed to alleviate the economic harm on businesses and persons, IRS Chief Counsel Michael Desmond spoke to some of the efforts the agency is making to achieve implementation. Here are a few takeaways from this item-packed discussion.

The presentation took place on April 2 and also included leaders from the ABA Tax Section: Sheri Dillon, Jennifer Breen, Lisa Zarlenga, as well as Anne Gordon (Tax Counsel, U.S. Senate) and Sunita Lough (IRS deputy commissioner services and enforcement).

CARES Act: This legislation was signed into law on March 27 and includes relief for small and large business through loans, guarantees, and other investments. Of particular note are provisions to provide qualifying employers with a refundable payroll tax credit of up to $5,000 for each employee’s wages paid from March 13, 2020, through Dec. 31, 2020. To qualify, a governmental shutdown order must have fully or partially suspended an employer’s operations during the COVID-19 crisis or the employer must have experienced a drop in gross receipts by more than 50% compared to the same quarter in 2019.

Further, the legislation seeks to make available additional cash flow and ensure liquidity by temporarily repealing the 80% of taxable income limitation on using the net operating loss carryovers that the 2017 TCJA imposed. Specifically, for a taxable year beginning before Jan. 1, 2021, a taxpayer can fully offset taxable income in that year with NOLs from prior taxable years. Also, taxpayers may carry back NOLs arising in 2018, 2019, and 2020 to their prior five taxable years. (This is the Tax Code § 172 provision.) Speakers noted that, if you are thinking of carrying back five years to offset prior income and get a refund, you may also have to amend state tax filings.

A key question was how quickly taxpayers could monetize their losses and get refunds. Chief Counsel Desmond said this issue was top of the list and two sets of guidance were coming soon, one addressing substantive issues and one procedural issues.

IRS notices: IRS Notice 2020-18 provides for an extension of the federal income tax filing date from April 15, 2020 (whether due date or extension) to July 15, 2020. The extension is automatic. Taxpayers may defer any amount of federal income tax payments until July 15, 2020. Note that this notice does not address payments due for other quarters or fiscal year taxpayers. Taxpayers with a different filing or payment due date other than April 15 must abide by the original date as of now. This may create a situation where Q2 estimated income tax payments are due on June 15, 2020, while Q1 estimated income tax payments are postponed from April 15, 2020, to July 15, 2020. IRS Notice 2020-20 provides the most up-to-date guidance and augments the relief by including Gift Tax and Generation-Skipping Transfer Tax returns.

IRS representatives also noted that, in the spirit of the “People First Initiative,” the agency is trying to “help people and businesses during these uncertain times.” The agency “generally” will not start new audits but will work on refunds “where possible,” without in-person contact. For audits in the works, the IRS will continue the work, the idea being that most taxpayers want the audit over with. Also, IRS appeals will continue to work cases. Taxpayers are encouraged to promptly respond to requests for information in these cases.

Note that the IRS continues to process tax returns and to issue refunds and seeks “to help taxpayers through its self-serving tools.”

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