2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

This Year in Review

The IRS then issued relief providing for a deferral for filing tax returns and payments of tax. As a result, the deadline to file and pay income taxes, including the first quarterly estimated tax, was extended to July 15 without limitation and applied to all taxpayers. Subsequently, the Treasury expanded the deferral to include the second quarterly estimated tax, if normally due before July 15, and other “time sensitive acts” including making section 83(b) elections, completing like-kind exchanges, involuntary conversions, gain rollovers, and contributions to IRAs or health savings accounts. The TCJA suspended, for tax years 2018 through 2025, the deduction for personal casualty losses. However, an exception applies allowing a personal casualty loss deduction for these years for such losses which are “attributable to a federally declared disaster.” The Presidential declaration effectively makes the COVID- 19 pandemic a federally declared disaster throughout the country. However, a question remains concerning how the casualty loss rules apply to the pandemic. A casualty loss arises from fire, storm, shipwreck, or other casualty. It normally produces physical damage to property which is sudden and does not occur over time. As of this writing, the Treasury and IRS have not issued any guidance as to the application of the casualty loss rules in relation to the coronavirus. The Internal Revenue Code provides that losses otherwise allowed, which occur in a “disaster area” and are “attributable to a Federally declared disaster,” can be deducted, at the taxpayer’s election, in the year prior to the year of loss. This means that a COVID-19- related loss may be taken on a 2019 return. Given the impact of the virus on 2020 earnings, 2019 may produce a better tax result since the deduction could offset income taxed at a higher rate. Additionally, taxpayers do not need to wait until filing a 2020 tax return, but can get the benefit of a refund by filing under a quick refund process.

There are many business losses where this rule would also seem to apply, including abandonment of leasehold improvements due to closure of a business location, selling off excess and unsaleable inventory due to the lack of demand, contract cancellation payments, and loss of nonreturnable deposits. If you or your business are experiencing losses in 2020, review the facts to determine if these rules apply. The Code allows employers to make “qualified disaster relief payments” on a tax-free basis to the recipient. This was intended to permit a payer, generally an employer, to provide resources to cover certain costs, including: i) To reimburse and pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; ii) To reimburse or pay reasonable and necessary expenses incurred in the repair or rehabilitation of a personal residence or replacement of its contents, to the extent the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster. Prior guidance indicates that an employer can provide deductible qualified disaster relief to an employee. However, the Service has stated in Frequently Asked Questions that replacement of compensation is taxable and does not constitute qualified disaster relief. The IRS has not issued guidance on which specific expenses incurred in connection with the pandemic may be deducted or how to determine if they are “reasonable and necessary.” These may include costs to help pay for an office in the home or related expenses, increased medical expenses, and/or increased commuting costs for employees. A best practice would be for the employer to have a written policy with an administrative process and restrictions in place to determine appropriate payments to recipients.