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Will COVID-19 Affect the Substantial Presence Test?

Can days spent in the U.S. due to the COVID-19 Emergency count toward the Substantial Presence Test?

On April 21, 2020, the Treasury Department and the IRS issued a taxpayer-friendly Revenue Procedure (Rev. Proc.) 2020-20, which provides procedures for Eligible Individuals to claim a COVID-19 Medical Condition Travel Exception, as well as, provide relief in determining benefits under a U.S. income tax treaty with respect to income from dependent personal services performed in the U.S.

The world is going through its toughest time reeling from the impact of COVID-19. In dealing with the circumstance and for the betterment of their people, governments around the world have placed travel-related restrictions.  Foreign travelers are not able to return home and are stuck in the U.S. until the travel ban is lifted. Can these travel restrictions cause Eligible Individuals to become a resident of the United States for federal income tax purposes? Let’s look at the rules.

General Rule under Substantial Presence Test (SPT)

An individual who is not a U.S. Citizen or a lawful permanent resident (a Green-Card holder) can be considered a United States (U.S.) resident for federal income tax purposes if that individual meets the SPT under Section §7701(b)(3) of the Internal Revenue Code (the Code). To meet this test, an individual must be physically present in the U.S. on at least:

  • 31 days during the current year, and
  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
    • All the days you were present in the current year, and
    • 1/3 of the days you were present in the first year before the current year, and
    • 1/6 of the days you were present in the second year before the current year.

Exception Section §7701(b)(3) provides certain exemptions which will allow for certain individuals to exclude days if physically present in the U.S. One of the exemptions is Medical Conditions – if it arises while an individual is present in United States and is unable to leave the country, those days are excluded from the SPT calculation.

COVID-19 Impact

Travel and related disruptions resulting from the global outbreak of the COVID-19 virus may cause certain Eligible Individuals who did not expect to meet the SPT under the Code to become residents of the U.S. for federal income tax purposes during 2020.

Rev. Proc. 2020-20 defines Eligible Individual as one:

  1. Who was not a U.S. resident at the close of the 2019 tax year.
  2. Who is not a lawful permanent resident at any point in 2020.
  3. Who is present in the United States (without regard to this revenue procedure) on each of the days of the individual’s COVID-19 Emergency Period.
  4. Who does not become a U.S. resident in 2020 due to days of presence in the United States outside of the individual’s COVID-19 Emergency Period.

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For more information or questions on these impacts, please contact a member of the International Tax Team

An Eligible Individual who intended to leave the U.S. but was unable to do so due to the COVID-19 Emergency Travel Disruptions, may exclude up to 60 calendar days of presence in the U.S. An individual is presumed to have intended to leave the U.S. on any day during the individual’s COVID-19 Emergency Period, unless that individual has taken steps to become a lawful permanent resident of the U.S. Additionally, similar rules apply in determining an Eligible Individual’s eligibility for the treaty benefits and benefits claimed under the income tax treaty with respect to income from employment, or the performance of other dependent personal services within the U.S.

Procedure to Claim COVID-19 Medical Condition Travel Exception

An Eligible Individual who has a filing requirement to file Form 1040-NR for tax year 2020 must claim the COVID-19 Medical Condition Travel Exception by attaching Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, by the due date (including extension). Eligible Individual should complete Form 8843 as follows:

  • Part I and the general identifying information sections should be completed pursuant to the form instructions;
  • Parts II, III, and IV, if applicable, should be completed pursuant to the form instructions;
  • Part V should be completed by writing the following in each respective space:
    • for line 17a, “COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION.”
    • for line 17b, the start date of the Eligible Individual’s COVID-19 Emergency Period.
    • for line 17c, the end date of the Eligible Individual’s COVID-19 Emergency period.
    • line 18 should be left blank. There is no need for a physician’s statement when claiming the COVID-19 Medical Condition Travel Exception.

An Eligible Individual who is claiming an exemption from withholding on a dependent personal service income pursuant to a U.S. income tax treaty should provide the employer or other withholding agent Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services, certifying that the income is exempt. On line 14 of Form 8233, write “COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION” and specify the individual’s COVID-19 Emergency Period.

Failure to File

An Eligible Individual who fails to file Form 8843 with their Form 1040-NR to claim the COVID-19 Medical Condition Travel Exception may be eligible for the procedural relief under Section §301.7701(b)-8(d)(2) or the relief under Section §301.7701(b)-8(e).

Author: Hiten Patel, CPA | hpatel@withum.com

International Services Tax

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