Updated: Oct 5, 2022
On April 21, 2020, the IRS issued two Revenue Procedures dealing with individuals who end up spending more days in the US in February and March of 2020 than they expected because of Covid, and issued an FAQ related to business conducted in the US. In some cases, the individual’s presence in the US during the Covid Emergency Period is ignored for different US tax purposes.
First, Rev Proc 2020-20 allows a taxpayer who is neither a US citizen or green card holder to ignore certain days spent in the US during the “Covid-19 Emergency Period” from counting as US presence days for purposes of the 183 day SPT residency test. Such days must constitute 60 continuous days in the US spent in the Period between February 1, 2020 and April 1, 2020, where the taxpayer was not a US resident at either the close of 2019 or at any time in 2020 (due to other days). For example, if the non-resident individual did not spend any days in the US in 2018 or 2019, spent 60 days in February and March, and then spent 130 days between May and December, and did not become a US resident in 2021, the 60 days in February and March would not count towards the 183 day residency test for 2020, and they would therefore remain a non-resident for the full year. This “Medical Condition Exception” must be applied for on the Form 8843.
Similarly, where the same taxpayer as above is a resident in a treaty country and seeks a treaty exemption from US tax on US source employment income on the basis of spending less than 184 days in the US, the days spent in the US during the Covid-19 Emergency Period because of Covid-related travel disruptions will not count towards the 183 day treaty test. They could claim a treaty exemption for such US wages, as long as the costs of their compensation are not borne by a US entity or permanent establishment, even if they actually spent more than 183 days in the US in 2020.
Second, Rev Proc 2020-27 provides some relief for US citizens who live abroad and claim the section 911 foreign earned income exclusion (of up to $107,600 of foreign wages) if they qualify under either the 330 day (foreign) physical presence test or the (foreign) bona fide residence test. In particular, it allows them to ignore days spent in the US between February 1, 2020 and July 15, 2020, for purposes of determining whether they satisfy either test, if they had a reasonable expectation that they would have met the presence/residence requirements but for the Covid emergency.
Finally, the IRS issued a FAQ that deals with non-resident individuals or foreign corporations that carry on business in the US through services rendered by an individual in the US. While the portion of income that relates to such services is generally taxable in the US, the FAQ excludes it if the services are conducted by individuals temporarily present in the US during an uninterrupted 60 days between February 1, 2020 and April 1, 2020, if they would not have performed the services in the US but for the Covid travel disruptions. In addition, where the foreign business owner wants to invoke a treaty exemption from US tax on US business income on the grounds that they don’t have a permanent establishment (PE) in the US, and the particular treaty has a provision that depends on the number of days their employees are present in the US, the days spent by such temporarily present individuals during the Emergency Period do not count.
Let’s take the same example as above of the individual who spent 60 days in the US in February and March because they were forced to stay in the US following a weekend vacation in the first week of February, and then spent 130 days in the US between May and December for work. In determining whether their (foreign) employer is subject to US tax, one needs to first determine the portion of its income that relates to business being carried on in the US (for example, through services performed in the US by its employees). Here, the first part of the FAQ would exclude from such taxable income the portion that relates to services carried on by such temporarily present individual between February 1 and April 1. The portion that relates to US services past April 1 is not excluded however, unless it can be exempted by a tax treaty that the US has with the country in which the employer resides. If that particular tax treaty has a “services PE” clause (ex. where a foreign employer is taxable in the US if its employees are providing services to a single US client for a period of at least 183 days – a provision that exists in the Canada-US tax treaty), the second part of the FAQ states that, in determining whether this 183 day (Services PE) test is met (and thus the post April 1 income is not treaty exempt to the employer), one can exclude the days spent by that temporarily present individual in February and March.