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Tax Benefits for Individuals and Companies from IRS Due to the Pandemic

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The pandemic has forced many people to make changes in their finances. For businesses, the Covid-19 virus has become a bane. The Federal Government has done its part by coming up with stimulus packages and giving unemployment benefits. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") provides several relief measures to aid businesses get through the coronavirus pandemic.

Rules have been modified to help overcome net operating losses and interest expense deductions, minimum tax credits, and more. Employers now have several tools at hand to reduce tax liabilities and increase cash liquidity.

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Most people were preparing to file tax returns when the virus hit. The government moved the federal tax filing and payment deadline to July 15, 2020 for those who did not seek any extension for filing. If additional time for filing is needed, seeing the situation playing out in the US, then businesses can apply for one through Form 7004.

The government is offering deferrals in employer payroll taxes. But it is important to note that employers availing the Payment Protection Program funds are not eligible for such deferments.

The new tax laws may allow companies to adjust their net operating losses against profits for the previous two years. If you paid tax on earnings in recent years, the exact period is yet to be determined, then you might be able to claim losses for 2019 and 2020 against those profits and apply for a refund. Businesses that paid taxes for 2019 profits may be able to adjust the 2020 losses against it. All companies need to keep track of all losses of income and Covid-19 related costs to ensure recovery from the previous year’s performance.

Tax deductibles over loan interest up from 30 to 50 per cent

One of the provisions is allowing businesses to increase their tax deductibles over loan interests from 30 to 50 per cent, which will amount to a nearly $13 billion tax break in total and save millions for companies who may not be too overburdened by the pandemic.

Under the 2017 tax reform, the interest that can be deducted by most taxpayers is 30 per cent of the adjusted taxable income. But under the revised provisions under CARE, taxpayers can increase this limit on allowable business interest deduction from 30 percent to 50 percent of adjusted taxable income (ATI). This is allowed for both 2019 and 2020. The taxpayers can also use their ATI in 2019 in place of their 2020 ATI for purposes of determining the deductibility of their business interest expense for 2020, which could increase the business interest deduction.

"It has a huge impact," said Mark Peltz, a senior advisor at accounting firm Mazars USA LLP to Business Insider. "A lot of our clients are in desperate need of cash right now. They're trying to survive, they're just trying to make their payroll."

It is this provision that is leading to some concerns among tax experts and economists who believe that this provision will end up benefiting bigger companies who do not need the leverage to see them through the pandemic.

"I really don't see how this provision is addressing the COVID-19 crisis, particularly when it's not really targeted," said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy. Manufacturing, telecommunications, and oil and gas are most likely to benefit as they borrow heavily to facilitate expansion and equipment upkeep. Most such companies go into debts heavily to pay for acquisitions, or to stay afloat. Also, companies that borrow for acquisitions and mergers will see a benefit as their tax bills will definitely lower.

"I think you're definitely going to see a lot of companies benefit from this," said Amanda Wilson, a tax attorney at Lowndes, a Florida law firm.

Another critical factor of the CARES Act is that it allows the 2019 income to be included in the interest calculation for 2020. This will help many companies tremendously as otherwise, interest will form a greater part of most companies' costs this year as earnings are sure to decline in 2020, and many will be pushed over to the interest deduction cap.

Tax credit for leaves

According to the IRS, “The paid sick leave credit and paid family leave credit are available for eligible employers who pay qualified sick leave wages and/or qualified family leave wages from April 1, 2020, through December 31, 2020, and who have fewer than 500 employees.” The terms keep on changing so keep updated by visiting the IRS site.

The PPP also has provisions for fund forgiveness under special cases, like using 75 per cent of the loan amount for payroll. Also payment deferrals are being provided under special cases, the latest updates need to be checked constantly from the SBA disaster loan programs.

Economic Impact Payment

The IRS has come up with a non-filers tool on its site for non-taxpaying Americans to get the benefit of the Economic Impact Payments."IRS employees worked around the clock to deliver the Economic Impact Payments and new tools to help taxpayers in record time," said IRS Commissioner Chuck Rettig. "Even with these unprecedented steps, there remain people eligible for these payments who need to take action. Registering to receive the payments is easy, and millions of non-filers have already taken this step. We urge everyone to share this information widely to help more people receive these payments."

In the past two months, more than 159 million Americans have received Economic Impact payments totaling almost $267 billion.

Qualified Opportunity Funds 

The IRS recently released guidance for Qualified Opportunity Funds (QOFs). The IRS has extended time for people to invest property gains. Taxpayers who sold a property for an eligible gain and who would have had 180 days to invest in a QOF to defer that gain, may have additional time. Notice 2020-39 provides that if a taxpayer's 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF. Some further concessions have been given on investment in QOFs.

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