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IRS relief for individuals and businesses stuck in the US during COVID-19

The travel disruption caused by COVID-19 has led to many of those who were travelling to the US for business, leisure, or even docked on a cruise ship in US territorial waters, to extend their stay for longer than expected. 
Relief for individuals

For individuals, this may have created a situation where you have become a resident in the US for Federal and State tax purposes. For businesses, this could also have created a US trade or business or a permanent establishment in the US. The Treasury Department and the IRS have responded to these issues and published various guidance that provides relief for those affected.

Relief for individuals

Up to 60 consecutive calendar days of US presence that are presumed to arise from COVID-19 travel disruption will not be counted for determining US tax residency under the US “substantial presence test”.  

For example, say we had a Hong Kong citizen assigned to work in the US on 1 January 2020 for an assignment of less than six months, however due to COVID-19 they have had to extend their stay beyond 30 June 2020 (the six months’ cut off point). Under the “substantial presence test”, they would be a US resident because during 2020, they have spent at least 183 days in the US. If they have US days in prior years, 1/3 of the US days in 2019 and 1/6 of the US days in 2018 would also count towards 2020. 

2018

2019

2020 (183 allocation)

Spent 6 days

Count 1

Spent 60 days

Count 20

Spent 183 days, count 183 + 20 + 1 = 204

= “Substantial presence test” satisfied

Spent 60 days

Count 10

Spent 126 days

Count 42

Spent 183 days, count 183 + 42 +10 = 235

= “Substantial presence test” satisfied

 

However, as the 60 days are excluded from the “substantial presence test”, it could mean that you continue to be considered as a nonresident alien from a tax perspective, meaning that you must pay taxes on income you earn in the US, but you do not have to pay tax on any foreign-earned income.

In addition, if you are still resident in the US even after taking into consideration up to 60 days for COVID-19 travel disruption, there could be relief under double taxation treaty if you are also resident in a jurisdiction that has such a treaty with the US, such as Thailand or the Philippines. However, not all jurisdictions have a double taxation treaty with the US (notably Hong Kong and Singapore do not have them), so the range of options available to you will depend on where you were normally resident before your travel plans were affected by the pandemic.

Unfortunately, both of these options may not be enough for you to avoid a US tax liability because there is a flat rate tax of 30% on US sourced capital gains in the hands of nonresident alien individuals physically present in the US for 183 days or more in the taxable year. 

Qualifying for benefits under a US income tax treaty with respect to income from personal services performed in the US.

Under some US income tax treaties, employment income could remain non-taxable as the 60 day exemption can also apply to the dependent personal services section of the treaty. This exempts employment income from tax for short-term visitors (those who have been present in the US for no more than 183 days in any 12 month period that begins or ends in the relevant calendar year).

The exemption of those US days may need to be claimed using Form 8843. However, a review of your circumstances should be done to determine whether Form 8843 is actually required. Nevertheless, you should always keep adequate records to support the reliance on the Revenue Procedure and you should be prepared to produce these records and complete Form 8843 if requested by the IRS.

Again, it will depend where you were resident before the pandemic, as to what relief is available. Not all jurisdictions have a treaty with the US and each treaty is slightly different anyway, so the details of each case would have to be examined very carefully.

Please note that each State in the US will have their own tax residency rules, so you will need State-specific advice, as they may not necessarily follow the Federal residence position.

About the authors

Allan Wilkinson

+852 3192 7083
wilkinsona@buzzacott.hk
LinkedIn

Virginia Zee

+852 3192 7084
zeev@buzzacott.hk

For individuals, this may have created a situation where you have become a resident in the US for Federal and State tax purposes. For businesses, this could also have created a US trade or business or a permanent establishment in the US. The Treasury Department and the IRS have responded to these issues and published various guidance that provides relief for those affected.

Relief for individuals

Up to 60 consecutive calendar days of US presence that are presumed to arise from COVID-19 travel disruption will not be counted for determining US tax residency under the US “substantial presence test”.  

For example, say we had a Hong Kong citizen assigned to work in the US on 1 January 2020 for an assignment of less than six months, however due to COVID-19 they have had to extend their stay beyond 30 June 2020 (the six months’ cut off point). Under the “substantial presence test”, they would be a US resident because during 2020, they have spent at least 183 days in the US. If they have US days in prior years, 1/3 of the US days in 2019 and 1/6 of the US days in 2018 would also count towards 2020. 

2018

2019

2020 (183 allocation)

Spent 6 days

Count 1

Spent 60 days

Count 20

Spent 183 days, count 183 + 20 + 1 = 204

= “Substantial presence test” satisfied

Spent 60 days

Count 10

Spent 126 days

Count 42

Spent 183 days, count 183 + 42 +10 = 235

= “Substantial presence test” satisfied

 

However, as the 60 days are excluded from the “substantial presence test”, it could mean that you continue to be considered as a nonresident alien from a tax perspective, meaning that you must pay taxes on income you earn in the US, but you do not have to pay tax on any foreign-earned income.

In addition, if you are still resident in the US even after taking into consideration up to 60 days for COVID-19 travel disruption, there could be relief under double taxation treaty if you are also resident in a jurisdiction that has such a treaty with the US, such as Thailand or the Philippines. However, not all jurisdictions have a double taxation treaty with the US (notably Hong Kong and Singapore do not have them), so the range of options available to you will depend on where you were normally resident before your travel plans were affected by the pandemic.

Unfortunately, both of these options may not be enough for you to avoid a US tax liability because there is a flat rate tax of 30% on US sourced capital gains in the hands of nonresident alien individuals physically present in the US for 183 days or more in the taxable year. 

Qualifying for benefits under a US income tax treaty with respect to income from personal services performed in the US.

Under some US income tax treaties, employment income could remain non-taxable as the 60 day exemption can also apply to the dependent personal services section of the treaty. This exempts employment income from tax for short-term visitors (those who have been present in the US for no more than 183 days in any 12 month period that begins or ends in the relevant calendar year).

The exemption of those US days may need to be claimed using Form 8843. However, a review of your circumstances should be done to determine whether Form 8843 is actually required. Nevertheless, you should always keep adequate records to support the reliance on the Revenue Procedure and you should be prepared to produce these records and complete Form 8843 if requested by the IRS.

Again, it will depend where you were resident before the pandemic, as to what relief is available. Not all jurisdictions have a treaty with the US and each treaty is slightly different anyway, so the details of each case would have to be examined very carefully.

Please note that each State in the US will have their own tax residency rules, so you will need State-specific advice, as they may not necessarily follow the Federal residence position.

Relief for businesses

Relief for businesses

Certain US business activities by nonresident aliens or foreign corporations will not be counted when determining whether the individual or entity is engaged in a US trade or business, or has a permanent establishment, if the activities would not have been conducted in the US but for the COVID-19 travel disruption.

The below are subject to Federal tax on their business income from the trade or business:

  • Nonresident aliens who perform services or other activities in the United States
  • Foreign corporations that employ individuals or engage agents to perform services or other activities in the United States, and are engaged in a US trade or business. 

If you are performing these services or activities and are temporarily in the US solely due to COVID-19 emergency travel disruption, you may still be treated as engaged in a US trade or business. The IRS have published guidance on this issue and generally stipulate that certain US business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether you or the corporate entity is engaged in a US trade or business, or has a US permanent establishment.

What should you do?

What should you do?

In all events, if you find yourself living and working in the US during COVID-19, you should retain contemporaneous documentation to prove the period chosen as the COVID-19 emergency period, and that the relevant business activities conducted would not have been undertaken in the US, but for COVID-19 emergency travel disruption.

So, in short, don’t lose your passport with your original entry/exit dates, flight records, and anything else that proves your stay in the US was extended due to the impact of COVID-19 on your travel plans, and be ready to provide them to the IRS if asked to.

As a nonresident alien or foreign corporations (including those that are partners in partnerships) you can submit protective filings of your annual US tax returns, even if you believe you are not required to file for the 2020 taxable year, because you were not engaged in a US trade or business. This would allow you to avail yourself of the benefits and protections that arise from such filings, such as those relating to deductions, statutes of limitations, and claiming tax treaty-based relief.

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