This alert provides a further update in relation to U.S. federal and state tax matters to our Investment Management clients. We analyze the federal income tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We also provide additional updates regarding the extension of due dates for state tax filings and payments as well as FATCA filings for certain funds.
For additional information, please visit our COVID-19 Resource Center or reach out to your Seward & Kissel relationship contact.
I. Key CARES Act Considerations for Investment Fund Managers
- Investment management companies that have employees may be eligible to claim payroll tax benefits. In addition to the payroll tax credits authorized last week, investment management companies may defer payment of 2020 payroll taxes until the end of 2021 and 2022 and may be eligible to claim additional payroll tax credits, as described below.
- In addition, highly-leveraged funds (and possibly portfolio companies in private equity fund structures or certain side pocket investments) that were subject to the interest deductibility limitation may benefit from the expanded limitation on business interest deductibility.
- Finally, given the changes to interest deductibility and the limitation to excess business losses, the disclosure contained in funds’ offering memoranda may be updated on a going-forward basis.
II. Summary of Key Provisions of the CARES Act
- Advance Refunds for Certain Taxpayers
- For their first tax year beginning in 2020, eligible individuals will receive an advance tax refund as a credit against their 2020 federal income tax liabilities in the amount of $1,200 ($2,400 in the case of persons filing jointly) plus $500 per qualified child.
- The amount of the credit begins to phase out when a single taxpayer’s adjusted gross income on his or her most recently filed tax return exceeds $75,000 (or $150,000 if married filing joint). Taxpayers with adjusted gross income above $99,000 (or $198,000 if married filing joint) will not receive this advance refund.
- Eligible individuals are U.S. citizens and resident aliens and who cannot be claimed as a dependent on another taxpayer’s U.S. federal income tax return.
- Modifications of Limitation on Business Interest
- For 2019 and 2020 taxable years, the deduction for business interests expense is increased from 30% to 50% of “adjusted taxable income” plus the taxpayer’s business interest income.1
- For partnerships, the above change of limitation shall not apply for a taxable year beginning in 2019 and special elections are available to partnerships subject to this limitation.
- Retirement Plan Changes
- The retirement plan loan limit for 180 days after the enactment of the law will be raised to the lesser of $100,000 (formerly $50,000) or the vested account balance of the individual.
- Individuals may take a “coronavirus-related distribution” of up to $100,000 from their retirement account without the 10% early withdrawal penalty applying. The amount of such distribution that would be included in gross income may instead by included over a three-year period. This amount may then be recontributed to the retirement account within 3 years. This allows an individual who took such a distribution to recontribute the amount of the distribution in addition to any applicable yearly contribution maximum.
- A “coronavirus-related distribution” is a distribution from an eligible retirement plan made on or after March 19, 2020 and before December 31, 2020 to an individual: (i) diagnosed with SARS-Cov-2 or COVID-19; (ii) whose spouse or dependent is diagnosed with such disease; or (iii) who has experienced adverse financial consequences as a result of being quarantined, being furloughed, or being laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, or closing or reducing hours of a business owned or operated by the individual due to such virus or disease.
- The repayment of certain outstanding retirement plan loans due during 2020 may be delayed for 1 year.
- A retiree also may choose to forgo any required minimum distribution for 2020.
- Special Rules for Charitable Contributions for 2020
- For any taxable year beginning in 2020, individual taxpayers who do not itemize their deductions will be allowed an above the line deduction not to exceed $300 in the aggregate for cash contributions to certain qualified charities (excluding donor advised funds, supporting organizations and private nonoperating foundations).
- For taxpayers who do itemize their deductions, the cap on deductions for cash contributions to certain qualified charities (excluding donor advised funds, supporting organizations and private non-operating foundations) has been temporarily raised for contributions made in 2020.
- For individual taxpayers, rather than being capped at 60% of a taxpayer’s “contribution base” (defined as AGI computed without regard to any net operating loss carryback), these deductions are now capped at the excess of the taxpayer’s contribution base over the amount of charitable contributions by the taxpayer that do not qualify for the temporary exception (i.e., non-cash contributions or contributions that are not made to certain qualified charities). Contributions above this cap may be carried forward for 5 years.
- For corporate taxpayers, rather than being capped at 10% of the taxpayer’s taxable income, these deductions are now capped at the excess of 25% of the taxpayer’s taxable income over the amount of charitable contributions by the taxpayer that do not qualify for the temporary exception. Contributions above this cap may be carried forward for 5 years.
- The taxpayer must make an election in order to take advantage of this temporary change in the law.
- Payroll Tax Relief
- The CARES Act provides additional payroll tax relief on top of the payroll tax credits authorized under the Families First Coronavirus Response Act.
- Employer-side payroll taxes that accrue during 2020 after the enactment of the CARES Act are payable in equal 50% installments at December 31, 2021 and December 31, 2022.2
- Certain employers may claim a refundable payroll tax credit equal to 50% of the qualified wages paid between March 12, 2020 through the end of 2020.
o Eligible employers generally include businesses that were fully or partially suspended during the calendar quarter pursuant to an applicable government order due to COVID-19 or gross receipts for the calendar quarter are less than 50% of the gross receipts for the same calendar quarter for the prior year and certain other requirements are met.3
- Qualified wages depend on the number of average fulltime employees in 2019. For employers with fewer than 100 fulltime employees last year, all wages are eligible. For larger employers, only the wages of employees who are furloughed or subject to reduced hours are eligible.
- The amount of qualified wages (including health benefits) eligible for the credit with respect to any individual employee is limited to $10,000 and limited to applicable employment taxes (as reduced by any credits allowed under Families First Coronavirus Act) on the wages paid for such calendar quarter, and the excess shall be refunded to the employer.
- Technical Fix to Depreciation Rules
- The CARES Act fixes a glitch in the depreciation rules that inadvertently treated “qualified improvement property” as 39-year property for certain taxpayers. Such property is now reclassified as 15-year property that is for 100% first-year bonus depreciation as if this rule was included in the Tax Cuts and Jobs Act of 2017. This change benefits restaurants and retail businesses.
- Modifications for Net Operating Losses
- For corporate taxpayers, the net operating loss deduction limitation of 80% of taxable income is eliminated for tax years beginning before January 1, 2021.
- For tax years of corporate tax payers beginning after December 31, 2020, the 80% limitation is amended such that it applies after taking into account the net operating loss deduction for losses carried over from taxable years beginning before January 1, 2018.
- Net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 are allowed as carryback to any of the five tax years preceding the tax year the loss occurred.
- Modification of Limitation on Losses for Taxpayers Other Than Corporations
- For taxpayers other than corporations, the effective date for limitations on excess business losses of noncorporate taxpayers has been postponed from taxable years beginning after December 31, 2017 to taxable years beginning after December 31, 2020.
- To the extent a 2018 or 2019 federal income tax return has been filed claiming an excess business loss, the taxpayer will need to consider amending the return.
III. Extension of Certain Tax Filing and Payment Deadlines
- Treasury extended the April 15 due date for federal income tax returns, tax payments for 2019 and estimated 2020 taxes to July 15. See our Memorandum here.
- The IRS extended the due date for FATCA filings for funds and other financial institutions in “Model 2” jurisdictions, including Bermuda and Hong Kong.
- In response to July 15 federal due date for tax returns and payments, states have begun to follow suit.
|New York State||The April 15 tax filing and payment due date for personal and corporate income tax has been extended to July 15.||New York State Filing and Payment Relief|
|Taxpayers required to file sales tax returns and remit sales tax may request relief from penalties and interest.||Sales Tax Relief|
|New York City||New York City Department of Finance (“DOF”) will allow a waiver of penalties for DOF-administered business and excise taxes due between March 16, 2020, and April 25, 2020.||Business and Excise Tax Relief Notice|
|New York City will waive penalties for all New York City Real Property Transfer Tax (“RPTT”) returns due between March 15, 2020, and April 25, 2020. Taxpayers may request to have the penalties waived on a late-filed return, or in a separate request.||RPTT Relief Notice|
|Connecticut||The filing deadlines for certain annual tax returns due on or after March 15, 2020, and before June 1, 2020, are extended by at least 30 days. The payments associated with these returns are also extended to the corresponding due date in June.||Connecticut Business Return Relief|
|Connecticut is extending the filing and payment deadline for personal income tax returns 90 days, to July 15, 2020. The extension also applies to Connecticut estimated income tax payments for the first and second quarters of 2020.||Connecticut Personal Income Tax Relief|
|New Jersey||The state income tax filing deadline for individuals and corporations will be extended from April 15 to July 15, according to a joint statement from Governor Phil Murphy and other New Jersey state legislators.||New Jersey Relief|
|Maryland||The filing and payment deadlines for 2019 Maryland income tax returns are automatically extended from April 15, 2020 to July 15, 2020. The deadline for filing most other business tax returns is extended to June 1, 2020.||Maryland Tax Alert|
|Washington, D.C.||The deadline for taxpayers to file and pay their 2019 District of Columbia individual and fiduciary income tax returns (D-40, D-41, and D-40B), partnership tax returns (D-65), and franchise tax returns (D-20, D-30) is extended to July 15, 2020.||D.C. Tax Announcement|
|Virginia||All Virginia income tax payments due between April 1, 2020 to June 1, 2020, can be submitted to the Virginia Department of Taxation any time on or before June 1, 2020. The Department of Taxation will automatically waive late payment penalties if full payment is received by June 1, 2020.||Virginia Income Tax Bulletin|
|The Virginia Department of Taxation will consider requests from sales tax dealers for an extension of the due date for filing and payment of the February 2020 sales tax return due March 20, 2020.||Virginia Sales Tax Bulletin|
For additional information on recent COVID-19 tax developments, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Peter E. Pront (212-574-1221), Daniel C. Murphy (212-574-1210), Brett R. Cotler (212-574-1269) or Tyler J. Combest (212-574-1472).
1 See https://www.sewkis.com/publications/final-tax-reform-legislation/.
2 This deferral does not apply to certain businesses that had small business loan debt forgiven under the CARES Act. Loans guaranteed under section 7(a)(36) of the Small Business Act may be eligible for forgiveness under the CARES Act.
3 The credit is not available to employers receiving Small Business Interruption Loans under the CARES Act or the Work Opportunity Credit.