COVID-19 US finally offers relief to individuals and businesses with employees stranded in US
Treasury and IRS issued guidance providing tax relief to both individuals and businesses affected by travel disruptions arising from the COVID-19 pandemic. The guidance temporarily relaxes U.S. rules for determining tax residency to allow for the fact that individuals may have to remain in the U.S. or another country as a result of travel restrictions. The relief also extends to foreign businesses that would otherwise have no permanent establishment or taxable presence in the U.S., but have foreign workers temporarily present in the U.S. as a result of the COVID-19 pandemic. We can help clients understand the qualifications for these relief provisions and document their compliance with the requirements.
Non-U.S. Citizens and Permanent Residents
In general, an individual who is not a U.S. citizen or a permanent resident will be treated as a U.S. tax resident during a particular calendar year, and, hence, will be subject to U.S. federal income tax on a worldwide basis, if he or she exceeds the tax residency threshold in the U.S
Excluded from the days counted for this purpose is time spent in the U.S. for certain medical reasons.
Revenue Procedure 2020-20 provides a COVID-19 Medical Condition Travel Exception for up to 60 consecutive calendar days of U.S. presence that are presumed to arise from travel disruptions caused by the COVID-19 pandemic. These days will not be counted for purposes of determining U.S. tax residency.
Certain filing requirements apply to eligible individuals who are required to file a U.S. income tax return. Those who qualify for relief but are not required to file a U.S. income tax return should document their qualification for the exemption and should retain all relevant records to show they meet the requirements of the COVID-19 Medical Condition Travel Exception.
For more information regarding U.S. taxable residency requirements, see Coming to America – For Individuals.
Foreign Businesses with Workers in the U.S.
In general, an overseas company with employees temporarily in the U.S. may be deemed as having a taxable presence or permanent establishment in the U.S. and become subject to U.S. tax and filing obligations.
IRS issued frequently asked questions clarifying that the activities of foreign businesses, that would otherwise have no U.S. trade or business or permanent establishment in the U.S., but have foreign workers temporarily present in the U.S. as a result of the COVID-19 pandemic, may choose an uninterrupted period of up to 60 calendar days beginning on or after February 1, 2020 and on or before April 1, 2020 during which such activities would not be taken into account in determining whether such foreign business has a taxable presence or permanent establishment in the U.S.
For more information regarding U.S. tax planning for foreign-owned U.S. operations, see Coming to America.
U.S. Citizens or Permanent Residents in Other Countries
While U.S. citizens and permanent residents are generally subject to U.S. income tax regardless of their residence, the U.S. does offer to those who qualify limited tax exclusions for foreign earned income and foreign housing. To qualify for these tax exclusions an individual must be in a foreign country and have foreign income and must meet specific residency requirements.
Revenue Procedure 2020-27 provides relief to qualified individuals who were unable to satisfy the bona fide resident or physical presence test for the 2019 and 2020 tax years due to having to remain in the U.S. as a result of the COVID-19 pandemic. Specifically, an individual who left China on or after December 1, 2019 or another foreign country on or after February 1, 2020, but on or before July 15, 2020 to return to the U.S., will deemed to have been physically present in or a bona fide resident of that foreign country if the individual establishes a reasonable expectation that he or she would have satisfied the requirements of the bona fide resident or physical presence test but for the COVID-19 pandemic.
For more information regarding U.S. tax planning for U.S. citizens temporarily or permanently leaving the U.S., see Leaving America. We can help clients understand the qualifications for these relief provisions and document their compliance with the requirements.
The Treasury and IRS guidance comes as welcome news to both individuals and foreign businesses with employees who are indefinitely stranded as a result of COVID-19 travel disruptions and potentially subject to new tax requirements. We can help clients understand the qualifications for these relief provisions and document their compliance with the requirements.