As Covid-19 continues to spread around the globe, companies and individuals are facing a diverse and challenging set of issues. These issues span a number of different contexts including tax, and measures are being considered in the U.S. and internationally to help taxpayers navigate the unprecedented situation. In conjunction with U.S. Congressional efforts to address the economic impacts of the current crisis, the IRS and Treasury have been active in providing relief to impacted taxpayers as described more fully below.
Internationally, businesses also are facing tax considerations related to a remote workforce, which have existed historically but not on this scale. As businesses implement policies allowing their employees to work from home, some businesses may pay some of their employees’ expenses relating to setting up a home office, acquiring childcare, or other personal and living expenses. There are questions as to how these payments are treated for U.S. federal income tax purposes. Similarly, if employees are required to work remotely in another tax jurisdiction, due to government travel restrictions, there are taxable presence and permanent establishment considerations to be addressed. Providing guidance to employees to mitigate unanticipated tax risks is important.
This article addresses some key considerations for U.S. taxpayers related to the Covid-19 efforts.
EXTENSIONS OF TIME TO FILE
On March 13, 2020, the Department of Treasury and the IRS announced in Notice 2020-17 that corporate taxpayers would be permitted to defer up to $10 million in tax payments for 90 days, and individual taxpayers, including small businesses and pass-through entities, would be able to defer up to $1 million in tax payments for 90 days. Three days later, Treasury and the IRS issued superseding guidance, Notice 2020-18.
Like the prior guidance, Notice 2020-18 provides that taxpayers will be permitted to defer tax payments for 90 days, until July 15, 2020, and lifts the earlier cap on the amount of the deferral, such that unlimited amounts may be deferred. The due date for tax returns due on April 15, 2020 has also been extended until July 15, 2020.
The issuance of the Notices followed President Trump’s emergency declaration under the Stafford Act on March 13. President Donald Trump, Letter from President Donald J. Trump on Emergency Determination Under the Stafford Act, (March 13, 2020), available at: https://www.whitehouse.gov/briefings-statements/letter-president-donald-j-trump-emergency-determination-stafford-act/. The declaration specifically directed the Treasury Secretary “to provide relief from tax deadlines to Americans who have been adversely affected by the Covid-19 emergency.” The plan announced by Secretary Mnuchin appears to have been in furtherance of this directive, and Notice 2020-18 makes clear that this is the basis of the relief.
Initially, there was some uncertainty as to whether the President’s emergency declaration under the Stafford Act constituted a “disaster” for purposes of tax code Section 7508A. That provision allows an extension of up to one year, as specified by Treasury Department, with respect to numerous federal income tax deadlines if a “disaster” is declared at the federal level. These include due dates for filing federal income tax returns and payment of taxes, as well as deadlines for filing a U.S. Tax Court petition or claim for credit or refund. The Secretary also has the authority to extend the return filing deadlines under Section 6081 even if a disaster is not declared.
Notice 2020-18 implies that a federally declared disaster, as required under Section 7508A(a) currently exists. Under the Stafford Act, the President may declare either an “emergency” or a “major disaster.” 42 U.S.C. Section 5143(a). In the past, the IRS has interpreted a “disaster” to include both a declaration of an emergency and a major disaster under the Stafford Act. See, e.g., Revenue Ruling 2001-15 (in part, relating to the West Nile virus).
In addition to U.S. federal income tax return filing and payment deadlines, there are numerous other tax deadlines that may be extended if a disaster is declared. In each case, the Secretary must issue a notice or other release that specifies which deadlines are extended by a particular disaster. See Revenue Procedure 2018-58. To this end, the IRS also created a website to centralize all of its guidance regarding Covid-19 tax relief: https://www.irs.gov/coronavirus.
Since the issuance of Notice 2020-18, the IRS has announced through FAQs on its website certain clarifications of the relief available under the Notice. The FAQs provide, for example, that the guidance also applies to fiscal year taxpayers who have filing or payment due dates of April 15, 2020. IRS, Filing and Payment Deadlines Questions and Answers, Question 4, (March 24, 2020), available at https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers. However, no relief is available under Notice 2020-18 for taxpayers who have filing or payment due dates other than April 15, 2020, and the FAQs note that the deferrals only apply to the filing of federal income tax returns, not informational returns. Questions 5 and 10.
The FAQs further clarify that in the case of a taxpayer whose return filing date has been postponed from April 15, 2020, the due date of that taxpayer’s installment payments pursuant to the so-called transition tax under Section 965(h) have been postponed until July 15, 2020. Question 8. Any base erosion and anti-abuse tax (BEAT) payments have similarly been postponed until July 15, 2020. Question 9.
Although the deferrals under Notice 2020-18 apply only to filing of federal income tax returns, additional guidance issued by the IRS in the form of FAQs defers the due date for filers of Form 8966, the Foreign Account Tax Compliance Act Report. Under the FAQs, the due date to file the Form 8966 with the IRS is deferred from March 31, 2020, to July 15, 2020. IRS, FATCA—FAQs General, Reporting Question 4, (Mar. 25, 2020), available at https://www.irs.gov/businesses/corporations/frequently-asked-questions-faqs-fatca-compliance-legal.
While the above deadlines and payment dates have been deferred at the federal level, state filings or payments must be deferred at the state level. These deadlines may differ between the state and federal level or between individual states, and taxpayers will need to continue to monitor any changes. For reference, the Counsel on State Taxation (COST) has developed website to track state-level guidance related to Covid-19. Council on State Taxation, Covid-19: State Guidance, (March 27, 2020), available at
Another implication of the declaration of a disaster for purposes of Section 7508A is that payments of an employee’s unreimbursed personal expenses arising from a disaster may be excludable from the individual’s income and, if paid by an employer, would not be subject to payroll tax. This provision may allow employers to assist employees in addressing Covid-19 related personal expenses, without incurring a tax cost.
Section 139 allows an individual to exclude from gross income, among other items, amounts paid to reimburse or pay reasonable “personal, family, living, or funeral expenses incurred as a result of a qualified disaster,” so long as the expense is not compensated by the individual’s insurance or otherwise. Although no regulations have been issued under Section 139, the legislative history provides that individuals are not required to account for their expenses, given the circumstances, and that the exclusion will apply if the expenses are reasonably expected to be commensurate with the expenses incurred. Joint Comm. on Taxation, Technical Explanation of the ‘Victims of Terrorism Tax Relief Act of 2001,’” JCX 93-01, at 16 (Dec. 21, 2001), available at http://www.jct.gov/x-93-01.pdf. This conclusion was echoed by the IRS in Rev. Rul. 2003-12, which focused on grants provided by a company to its employees in response to a flood.
Employers that have or intend to pay their employee’s expenses incurred in working remotely should consider whether the payment may qualify as an ordinary and necessary business expense under Section 162 or a working condition fringe benefit under Section 132. Payments to non-employees (e.g., contractors) may qualify for the Section 139 exemption if the payments are made to reimburse or pay reasonable personal, family, living, or funeral expenses.
Companies should also consider the tax consequences of debt forgiveness. For example, the cancelation of a debt obligation may give rise to cancellation of indebtedness income to the debtor, and be reportable to the IRS by the creditor on a Form 1099-C absent relief from the IRS and Treasury. In the case of non-employee contributions, contributions to a charitable organization or tax-exempt fund may be more tax efficient.
REMOTE WORK BY EMPLOYEES
In some cases, Covid-19 travel restrictions and quarantines require employees to work outside the tax jurisdiction in which their employer is located. Ordinarily, there can be income and employment tax considerations related to the performance of work in a jurisdiction. Under international standards, a company generally is considered to have a taxable presence in any jurisdiction where it has a “fixed place of business.”
There is limited guidance on whether temporary remote work in response to travel restrictions gives rise to a taxable presence or permanent establishment. For example, Australia has released guidance in the form of FAQs. The Australian guidance provides that if an employee of a foreign company is present in Australia due to Covid-19, this will not in itself create a permanent establishment in Australia if: (1) “[t]he foreign incorporated company did not have a permanent establishment in Australia before the impacts of COVID-19”; (2) “[t]here are no other changes in the company’s circumstances”; and (3) “[t]he unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel as a consequence of COVID-19.” Australian Tax Office, COVID-19 frequently asked questions, (Apr. 3, 2020), available at: https://www.ato.gov.au/General/COVID-19/In-detail/COVID-19-frequently-asked-questions/?anchor=Internationalbusiness#PermanentestablishmentPE. But, the U.S. has not provided guidance on the issue.
In the absence of specific guidance, consideration may be given to updating current remote work policies to minimize the risk that the company, or its employees, are subject to tax in another jurisdiction as a result of remote work.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Chase helps multinational companies with significant operations in the U.S. plan their transactions—acquisitions, dispositions, joint ventures, restructurings and finance company arrangements—to achieve desired business objectives in the most tax-efficient manner. He routinely assists clients in navigating the rapidly changing maze of international tax rules and regulations that apply to multinational businesses, and provides advice on the implications of U.S. tax reform and non-U.S. tax changes in response to the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative.
Drawing on 20 years’ experience litigating complex and technical federal tax issues, Mary Monahan advises multinational corporations with respect to a wide range of tax matters, including international tax and tax planning for corporate acquisitions and restructurings (focusing particularly on tax accounting and income recognition issues), permanent establishment issues, insurance company issues, interest matters, information reporting and withholding matters, employment tax matters and eligibility for the research tax credit.
Brian Tschosik represents multinational clients in international tax planning, joint ventures, corporate restructurings and related financing. Before joining Eversheds Sutherland, Brian served as an intern for the Office of the Attorney General for the District of Columbia, where he assisted with the discovery process and in trial preparations.
The authors are based in Evershed Sutherland’s Washington office.