Cross-border guidance for individuals and businesses
IRS announces cross-border guidance for individuals and businesses whose activities and international travel plans have been disrupted due to the pandemic.
IRS news release IR-2020-77 announces cross-border guidance for individuals and businesses around the world whose activities and international travel plans have been disrupted due to the pandemic.
- Nonresident alien status and the COVID-19 medical condition travel exception
- S. business activities by nonresident aliens and foreign corporations
- S. citizens working abroad and the COVID-19 emergency
Nonresident alien status and the COVID-19 medical condition travel exception
Travel disruptions caused by the COVID-19 pandemic may cause some nonresident aliens to meet the substantial presence test and become U.S. resident aliens for tax purposes in 2020. Impacted individuals may, in turn, become ineligible for certain treaty benefits that require a limited presence in the U.S. The Treasury Department and IRS describe in Rev. Proc. 2020-20 how eligible nonresident aliens can avoid becoming accidental resident aliens by claiming the COVID-19 medical condition travel exception.
Background: substantial presence test, treaty benefits, and the medical condition exception
In general, an alien individual meets the substantial presence test and becomes a U.S. resident for tax purposes in a particular year if the individual is in the U.S. at least 31 days during that year and a total of at least 183 days counting all days in the year, one-third of the days in the preceding year, and one-sixth of the days in the second preceding year.
An alien individual does not count days toward the substantial presence test if the individual intended to leave the U.S. but was unable to do so because of a medical condition that arose while the individual was in the U.S. Similarly, many U.S. income tax treaties with other countries exempt a nonresident alien’s wages from U.S. tax if the individual is in the U.S. no more than 183 days in a 12-month period. Days in which an illness prevented the individual from leaving the U.S. are not included in the 183-day test.
The COVID-19 medical condition travel exception
Under Rev. Proc. 2020-20, an eligible individual who intended to leave the U.S. during the individual’s COVID-19 emergency period, but was unable to do so due to COVID-19 emergency travel disruptions, may exclude up to 60-calendar days of the individual’s COVID-19 emergency period from the substantial presence test. Likewise, the individual does not count days during the COVID-19 emergency period toward the 183-day test for treaty benefits.
Eligible individual. An eligible individual is any individual who:
- was not a U.S. resident at the close of 2019,
- is not a lawful permanent resident (green card holder) at any point in 2020,
- is present in the U.S. on each day of the individual’s COVID-19 emergency period, and
- does not otherwise become a U.S. resident due to counting days toward the substantial presence test outside of the individual’s COVID-19 emergency period.
COVID-19 emergency period. An eligible individual’s COVID-19 emergency period is a single period up to 60 consecutive calendar days starting on or after February 1, 2020 and on or before April 1, 2020. Eligible individuals may select their own emergency period within this parameter. For instance, the emergency period for an individual who selects a start date of March 15, 2020 would run from March 15 through May 13, 2020 inclusive.
The individual need not be ill with the COVID-19 virus during the individual’s emergency period. The individual will be presumed to have intended to leave the U.S. during the emergency period unless the individual has applied to become a lawful permanent resident of the U.S.
Procedure for claiming the exception
Eligible individuals who have a 2020 Form 1040-NR filing requirement must claim the exception by attaching Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition to their return. Parts I, II, III, and IV should be completed according to the form instructions. In Part V, the individual should show “COVID-19 Medical Condition Travel Exception,” the start date, and the end date of the individual’s COVID-19 emergency period on lines 17a, 17b, and 17c respectively. There is no need to attach a medical statement to the form. The individual should sign and date the form and retain a copy of it along with documentation that the individual was present in the U.S. during all of the individual’s emergency period. Form 1040-NR along with Form 8843 should be sent to the IRS by the due date (plus extensions) following Form 1040-NR instructions.
Eligible individuals who are not required to file Form 1040-NR do not need to file one just to submit Form 8843 with the exception. However, they should retain all relevant records and be prepared to complete Form 8843 if needed.
Treaty benefits. To claim an exemption from withholding on income from dependent personal services (generally, wages), the eligible individual should provide the employer with Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. On line 14 of the form, the individual should show “COVID-19 medical condition travel exception” and specify the individual’s COVID-19 emergency period. However, if the employer is already treating the individual’s income as exempt because of a previously submitted Form 8233 it isn’t necessary to provide an additional form.
The COVID-19 medical condition travel exception does not affect other available substantial presence test exceptions. For example, students in the U.S. for five years or less on an “F,” “J,” “M,” or “Q” visa are exempt from counting days toward the test. Also, a nonresident alien may apply the medical condition exception at a different time of the year because of COVID-19 or another medical problem. See IRS Pub. 519, U.S. Tax Guide for Aliens for more information about the substantial presence test, exceptions, and treaty benefits.
U.S. business activities by nonresident aliens and foreign corporations
In a related FAQ, the IRS clarifies that business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity engaged in a U.S. trade or business or has a U.S. permanent establishment. The start of the 60-day period must begin on or after February 1, 2020 and on or before April 1, 2020. The individual or entity must establish that the business activities would not have been conducted in the U.S. but for travel disruptions arising from the COVID-19 emergency.
U.S. citizens working abroad and the COVID-19 emergency
A U.S. citizen or resident alien who lives and works abroad may be eligible to exclude some or all foreign earnings from U.S. taxation. An individual who is required to leave a country because of war, civil unrest, or other similar adverse conditions will be treated as a qualified individual if he or she establishes a reasonable expectation of meeting the bona fide residence test or physical presence test, but for the adverse conditions. Earlier this year, the IRS listed countries for which the eligibility requirements for the foreign earned income exclusion are waived because adverse conditions during 2019 prevented individuals from meeting those requirements. See TAX in the News April 22, 2020.
The Treasury Department and IRS, in consultation with the Secretary of State, have determined that the global COVID-19 health emergency is an adverse condition as described in §911(d)(4) that precludes the normal conduct of business. Accordingly, Rev. Proc. 2020-27 provides that the waiver applies to:
- The People’s Republic of China (excluding Hong Kong and Macau) as of December 1, 2019, and
- Globally as of February 1, 2020.
An individual who establishes residency in or is physically present in the foreign country after the applicable dates is not eligible for relief under this revenue procedure.
An individual must have established residency, or have been physically present, in the foreign country on or before the applicable dates. The individual must also be able to establish a reasonable expectation that he or she would have met the requirements of §911(d)(1) to exclude foreign income but for the COVID-19 emergency.
The period covered by Rev. Proc. 2020-27 ends on July 15, 2020 unless an extension is announced. 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, will be treated as a qualified individual for the period the person was a bona fide resident or physically present in that country.
Example: Sherlock is in the U.K. on January 1, 2020 and expects to work in the U.K. for the entire calendar year. Because of the COVID-19 emergency, Sherlock leaves the U.K. on March 2, 2020. He returns on August 25, 2020 and works in the U.K. through the end of the year. Even though he does not meet the 330-day physical presence test, Sherlock is a qualified individual with respect to the period January 1 through March 1, 2020, and August 25 through December 31, 2020. He may exclude his U.K. income (up to the annual limit) for the period he is present in the U.K. If Sherlock had first arrived in the U.K. after February 1 or left after July 15, he would not be eligible for the relief in Rev. Proc. 2020-27.
See IRS Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad for more information about the foreign earned income exclusion and the bona fide residence and physical presence tests.