As we find ourselves in extraordinary times, the developing COVID-19 emergency has forced governments and businesses to take unprecedented measures, with significant personal and economic impact, to stem the spread of the virus.
As of the time of writing this article, the pandemic continues to spread, with more than 200 countries reporting over million individuals infected worldwide with the novel coronavirus.
In order to slow the spread of the virus, governments have provided social distancing guidelines and enacted stay at home orders as well as travel restrictions. As we continue to navigate this crisis, it is uncertain how long the protective measures taken by governments around the world will continue and what the lasting impact will be.
What is certain, as the world continues the fight to contain the spread of COVID-19, is that there will be a coming focus on recovery and a move to a new normal. It is important to consider and respond to the changes we all face now to be in a better position to emerge out of this crisis.
- Taxable Presence
- With the mobility of employees, individuals may have left those countries that have been significantly impacted to return to their home countries to work remotely. Where this occurs, multi-national businesses are at risk of establishing permanent establishments in countries they never envisioned having a taxable presence in. Multi-national businesses should closely manage and be aware of the movements of their employees in order to mitigate this risk.
- While applicable double-taxation treaties may provide some relief, in these instances, multi-nationals should analyze and manage their risk.
- U.S. State Nexus Issues
- In order to slow the spread of the virus governments have enacted stay at home orders for individuals to remain home and only venture out for essentials. This has led to many individuals to work remotely from home. It is not uncommon for employees to live in a different state than the state in which they work. Ordinarily, the presence of employees in a state will create nexus, or a taxable presence in that state, which will subject the employer to state income taxes.
- Some states, such as New Jersey, have provided guidance that the situation described above will not cause nexus in the state, if the company otherwise did not have a taxable presence in the state prior to the pandemic.
- Payroll Tax Deferment
- Under the CARES Act, employers and self-employed individuals can defer payment of the employer’s share (6.2%) of the Social Security payroll tax, but the deferred amount must be repaid in equal installments by December 31, 2021 and December 31, 2022.
- Employee Retention Credits
- The CARES Act provides, any business that is fully or partially suspended by government restrictions due to COVID-19 or experiences a decline of 50% in gross receipts as compared to the same quarter in 2019, is allowed a credit of 50% of the qualified wages up to $10,000 paid by the employer to each employee.
- Federal and State Income Tax Filings and Payments
- Certain federal income tax filings (e.g., Forms 1040, 1040-NR, 1120, 1220-F) and payments (including Section 965(h) installment payments) with a April 15 due date are postponed to July 15, 2020
- Many states have similarly provided guidance on postposed state filing and payment due dates.
- Taxpayers should analyze the impact of business disruptions on their U.S. federal income tax provisions and estimated tax payments.
- Other Tax Considerations
- The CARES Act provides for net operating losses (“NOLs”) arising from tax years beginning after December 31, 2017, and before January 1, 2020 to be carried back to each of the five preceding tax years. The provisions in the CARES Act essentially allows the carryback of losses incurred in later years where a lower corporate tax rate was in effect (21%) to offset income from earlier years that was subject to higher corporate tax rates. In addition, the CARES Act temporarily removes the limitation on NOLs to offset up to 80% of taxable income through the 2020 tax year. Due to these modification to the law, taxpayers may be able to carryback their NOLs and claim refunds on prior year tax returns.
- Under the CARES Act, the interest expense limitation under Section 163(j) has been increased from 30%to 50% of the taxpayer’s adjusted taxable income (i.e., EBITDA).
- In order to manage liquidity issues, taxpayers may consider an election under Section 41(h) which may allow a Qualified Small Businesses (“QSB”) to elect to apply up to $250,000 of R&D credit for income tax purposes against payroll taxes. A QSB is, a business that has less than $5 million in gross receipts for the tax year and zero gross receipts in the prior 5-year period.
Please reach out to Withum’s International Tax Service Team for more guidance on this or any related matter.
- Short-Term Business Considerations
- Considerable thought should be taken in regards to the business’ liquidity during these challenging times. Now should be the time to re-evaluate policies to move money from or to affected countries for unforeseen expenses and exchange rate fluctuations.
- Consideration should be given to contract performance with vendors and customers/clients where terms of in agreements may need to be modified or terminated.
- As most employees are working remotely during this time, electronic data protection measures should also be implemented and addressed.
- The U.S. Small Business Administration announced the Paycheck Protection Program, which offers $349 billion in forgivable loans to small businesses impacted by the COVID-19 pandemic, which can be used for payroll, group healthcare, mortgage, rent, utilities, and other expenses. Please visit Withum’s resource page on the SBA’s Financial Assistance Services for more information on the PPP and other programs.
- Withum has prepared a Business Preparedness Checklist to assist with steering your company through the crisis.
- Long-Term Business Considerations
- When we move toward recovery, businesses should analyze and plan for costs to reopen business and manufacturing facilities as well as other unforeseen costs related to ensuring employees remain healthy
- Assess the impact on the businesses’ supply chain and whether new preparedness measures should be implemented.
Author: Calvin Yung, JD, LLM | [email protected]
