The IRS Provides Tax Relief for Individuals and Businesses Affected by COVID-19-Related Travel Disruptions

In recognition of the disruption of travel plans resulting from the global outbreak of COVID-19 (the COVID-19 Emergency), the Internal Revenue Service (IRS) has provided relief to individuals and businesses whose tax status might otherwise have been adversely affected.

Relief for individuals

The substantial presence test. In general, foreign individuals are treated as U.S. residents, subject to U.S. federal income tax and filing requirements, if they are present in the United States for 183 days, either in a single year or under a formula based on their presence over a three-year period. In applying this “substantial presence” test, an individual is not treated as present in the United States on a day on which the individual intended to leave the United States but was unable to do so because of a “medical condition” that arose while the individual was present in the United States.

Under recently released Rev. Proc. 2020-20, the COVID-19 Emergency will be considered such a medical condition. In applying the substantial presence test, a foreign individual who intended to leave the United States during the individual’s “COVID-19 Emergency Period” but was unable to do so due to COVID-19-related travel disruptions (whether due to disruptions in transportation, shelter-in-place orders, quarantines, border closures, or recommendations to implement social distancing and limit exposure in public places) will be able to exclude a single period (the individual’s COVID-19 Emergency Period) of up to 60 consecutive calendar days, selected by the individual, starting on or after Feb. 1, and on or before April 1, during which the individual is physically present in the United States. Rev. Proc. 2020-20 provides that a foreign individual will be presumed to have intended but been unable to leave the United States during this period, unless the individual has applied, or otherwise taken steps, to obtain a green card.

The relief provided by Rev. Proc. 2020-20 is available to any individual who was not a U.S. resident at the close of the 2019 tax year, is not a green card holder at any point in 2020, is present in the United States on each day during the individual’s COVID-19 Emergency Period, and 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.

The Service provided procedures for individuals to follow in order to claim the benefit of this relief. An individual who claims relief under Rev. Proc. 2020-20 may claim other exceptions from the substantial presence test for which the individual is eligible, including for medical conditions or medical problems related to the COVID-19 virus.

Treaty benefits. Many U.S. income tax treaties exempt income from employment or other dependent personal services if, among other things, the recipient is present in the United States for no more than 183 days in any 12-month period that begins or ends in the relevant taxable year. For purposes of computing days of presence in the United States under this type of test, days on which an illness prevented the individual from leaving the United States are not counted. Rev. Proc. 2020-20 provides relief, similar to that described above with respect to the substantial presence test, for purposes of determining whether an individual qualifies for such an exemption under a U.S. income tax treaty.

Foreign earned income exclusion. In general, a “qualified individual” is able to elect to exclude from gross income the individual’s foreign earned income and housing cost amount. For this purpose, a qualified individual is an individual whose tax home is in a foreign country and who is either (a) a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (b) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days. The exclusion generally applies to income attributable to services performed during the applicable period.

An individual is treated as a qualified individual with respect to a period in which the individual was a bona fide resident of, or was present in, a foreign country if the individual left the country during a period for which the secretary of the Treasury determined that individuals were required to leave for specified adverse conditions that precluded the normal conduct of business. An individual must establish that, but for those conditions, the individual could reasonably have been expected to meet the eligibility requirements.

In Rev. Proc. 2020-27, the Service announced that the secretary of the Treasury has determined that the COVID-19 Emergency is an adverse condition that precluded the normal conduct of business (a) in China, as of Dec. 1, 2019, and (b) globally, as of Feb. 1, 2020. The period covered by Rev. Proc. 2020-27 ends on July 15, 2020, unless an extension is announced. Thus, for purposes of the earned income exclusion, an individual who left China on or after Dec. 1, 2019, or another foreign country on or after Feb. 1, 2020, but on or before July 15, 2020 (unless extended), will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, that foreign country if the individual establishes a reasonable expectation that he or she would have met the eligibility requirements but for the COVID-19 Emergency.

To qualify for relief, an individual must have established residency, or have been physically present, in the foreign country on or before the applicable date (Dec. 1, 2019, or Feb. 1, 2020). 

Relief for businesses

The Service also released responses to two frequently asked questions (FAQs) about the effect of COVID-19-related travel disruptions on the determination of whether a foreign individual or corporation will be treated as engaged in a U.S. trade or business (USTB) and whether a foreign individual or corporation will be treated as conducting business through a permanent establishment or fixed base in the United States (collectively, a PE).

Foreign individuals who perform services or other activities in the United States, and foreign corporations that perform services or other activities in the United States through employees or agents, may be considered to be engaged in a USTB, subject to U.S. federal income tax on the business income of that USTB. If an income tax treaty applies, the income of the USTB generally is not subject to tax unless the business in conducted through a PE.

In the FAQs, the Service provided that a foreign individual, foreign corporation or partnership in which either is a partner may choose an uninterrupted period of up to 60 calendar days, beginning on or after Feb. 1, 2020, and on or before April 1, 2020, during which services or other activities conducted in the United States will not be taken into account in determining whether the individual or corporation is engaged in a USTB, if such activities were performed by individuals temporarily present in the United States and would not have been performed here but for the COVID-19-related travel disruptions.

The Service also provided that during this period, the services or activities performed by individuals temporarily present in the United States will not be taken into account in determining whether a foreign individual or corporation has a PE, if such services or activities would not have occurred in the United States but for the COVID-19-related travel disruptions.

Domestic relief? While the FAQs provide relief with respect to U.S. federal income tax, comparable issues arise with respect to nexus rules under which a business may become subject to tax in a state due to its increased presence in that jurisdiction as a result of COVID-19-related travel disruptions. Any relief will likely be provided on a state-by-state basis.