Many U.S. international tax laws are determined based on time spent in or out of the U.S., as well as what type of activities and the amount of activities performed in the U.S. With the coronavirus greatly affecting the ability to travel, taxpayers could have been forced into unfavorable situations through no fault or desire of their own. Therefore, the IRS has announced several exceptions to international tax laws to account for the current situation.
Citizens, green card holders, and individuals meeting substantial presence are taxed as U.S. persons. Since this is such an important designation, taxpayers often take care to avoid meeting the test for substantial presence, which is based on time spent in the U.S. Under the coronavirus exception, if certain conditions are met, the IRS is allowing 60 consecutive days which are spent in the U.S. due to coronavirus related travel disruptions to not count towards substantial presence.
Treaty Benefits – Dependent Personal Services
Additionally, when a foreign worker is in the U.S., many treaties exempt withholding on dependent personal services based on the amount of time spent in the U.S. Under the coronavirus exception, if certain conditions are met, the IRS will also not count a 60 day period towards this situation.
Foreign Earned Income Exclusion
U.S. persons with their main abode in a foreign country, that also meet the test of bona fide residence or physical presence under Section 911, are allowed to exempt a limited amount of wages and housing costs from U.S. taxation. Under the coronavirus exception, if certain conditions are met, the IRS will not disallow this exclusion if the test is failed due to travel disruption from the coronavirus.
Income Effectively Connected to a U.S. Trade or Business
In general, a foreign business is taxable in the U.S. if it has U.S. sourced income that is effectively connected to a U.S. trade or business. Furthermore, if there is a treaty in place there must also be a permanent establishment. These determinations rely on activities and time spent in the U.S. Under the coronavirus exception, if certain conditions are met, the IRS will not count time or activities during a 60 day period towards this determination.
While these exceptions may be helpful, they are not “loopholes” by any means. Generally, taxpayers are only going to qualify if they have legitimately been affected by the coronavirus or related travel disruption. Also, there are many details, caveats, time frames, and dates that must be met. Therefore, it is important you review your situation in detail to see if you qualify.