Senate Finance Committee Chairman, and Ranking Member Disagree With Treasury’s PPP Guidance On Deductibility
Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., have criticized Treasury’s latest PPP guidance on deductibility as missing “the mark.”
“Since the CARES Act, we’ve stressed that our intent was for small businesses receiving [PPP] loans to receive the benefit of their deductions for ordinary and necessary business expenses,” Grassley and Wyden said in a November 19 joint statement. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless.”
Grassley and Wyden went on to criticize Treasury’s choice to “double down” on its position, which ultimately increases the tax burden on small businesses. “Small businesses need help maintaining their cash flow, not more strains on it,” they said.
Additionally, the Senate’s top tax writers alluded to the possibility of addressing this issue in year-end legislation, but encouraged Treasury in the meantime to reconsider its position. Notably, Grassley and Wyden are both cosponsors of Sen. John Cornyn’s, R-Tex., bipartisan Small Business Expense Protection Act, (S. 3612), which would clarify congressional intent that ordinary business expenses paid with forgiven PPP loans are deductible.
Treasury and the IRS have released two pieces of guidance on the tax treatment of expenses paid for with a Paycheck Protection Program (PPP) loan.
Rev. Rul. 2020-27, released late in the evening on November 18, provides sub-regulatory guidance on whether a PPP loan participant who paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects the loan to be forgiven. Additionally, the revenue ruling provides guidance regarding PPP loan participants who have not applied for forgiveness in 2020 but intend to in the following taxable year.
The PPP, created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, (P.L. 116-136), provided forgivable loans to eligible small businesses, certain non-profit organizations, veteran’s organizations, Tribal business concerns, independent contractors, and self-employed individuals adversely impacted by the COVID-19 pandemic.
Generally, Treasury states that if a business reasonably believes a PPP loan will be forgiven, expenses related to the loan are not deductible, regardless of whether the business has yet filed for forgiveness. However, in the case where a PPP loan is expected to be forgiven in the future but is, in fact, not, applicable business expenses can be deducted.
𝗗𝗶𝗱 𝘆𝗼𝘂 𝗸𝗻𝗼𝘄 𝘁𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼𝗻’𝘁 𝗵𝗮𝘃𝗲 𝘁𝗼 𝗯𝗲 𝗮 𝗹𝗲𝗴𝗮𝗹 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗼𝗳 𝘁𝗵𝗲 𝗨.𝗦. 𝘁𝗼 𝗯𝗲 𝗮 𝘁𝗮𝘅 𝗿𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗮𝗻𝗱 𝗵𝗮𝘃𝗲 𝗮𝗻 𝗼𝗯𝗹𝗶𝗴𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗳𝗶𝗹𝗲 𝗮 𝗨.𝗦. 𝘁𝗮𝘅 𝗿𝗲𝘁𝘂𝗿𝗻?
Non-U.S. citizens that live in the U.S. as residents are required to file U.S. income tax return and pay tax on their worldwide income even if their status in the U.S. is not that of legal resident.
For tax purposes a non-U.S. citizen is a resident of they meet one of two tests.
1) Under the lawful permanent residence test, a person is a resident alien if the person is a lawful permanent U.S. resident under the U.S. immigration laws.
2) Under the substantial presence test, a person is a resident alien if (i) the person is physically present in the current year for at least 31 days and (ii) the sum of the days present in the U.S. during the current tax year, plus one-third of the days for the immediately preceding tax year, plus one-sixth of the days for the second preceding tax year equals 183 or more. An individual who meets the substantial presence test can remain a nonresident alien he or she is present for fewer than 183 days during the current year, and, during this period, he or she maintains a closer connection with a foreign country. Certain days are excluded, including days present for medical reasons, commuting from Canada or Mexico, and present as a foreign government related individual, teacher or trainee, student, or professional athlete. An individual otherwise classified as a resident alien under these rules can be classified for U.S. tax purposes as a nonresident alien under a U.S. tax treaty if he or she is a dual- resident taxpayer and a resident of the treaty country under the treaty provisions.
It’s also important to remember that U.S. Residents, like citizens are taxable on their world wide income and that the statute of limitations for tax filing does not begin to run until the returns are filed.
Non-resident aliens may also be liable for taxes on U.S. Source income such as U.S. business income, rental income or capital gains generated in the U.S. https://rmsaccounting.com/non-resident-alien/
Because the rules are complex it’s best to discuss your situation with a tax professional that understands the complex laws and rules surrounding taxation if you have U.S source income or spend substantial time in the U.S.
On September 3rd, the IRS held a teleconference for the payroll industry regarding the postponement (commonly referred to as deferral) of the employee’s share of Social Security tax. The conference allowed the IRS to clarify information provided in Notice 2020-65 along with an opportunity for the payroll provider community to ask the IRS questions about the program and its implementation. Both the clarifications and the questions along with the answers to these questions provided by the IRS.
Definition of applicable wages. The IRS clarified that applicable wages are determined on a pay period-by-pay period basis. Specifically, the employer should look at the pay period and determine if whether the employee is eligible for the postponement.
Postponement is optional. The IRS clearly stated that the postponement of the tax is optional for the employer. However, the IRS stated the Notice does not address how to implement the relief so employers are permitted to solicit input from their employees regarding the postponement as well as permitting employees to opt in or opt out if the employer elects to take the postponement.
Employer liability. As the notice clarifies, the employer is the “Affected Taxpayer” and the IRS stated that if an employer is unable to withhold from an employee during January 1, 2021 through April 30, 2021, the employer remains liable for the employee’s share of Social Security tax and must remit the taxes by April 30, 2021 to avoid penalties, interests, and additions. For example, if an employee should terminate on January 2, 2021 before an employer can arrange withholding, the employer remains liable for the postponed amount.
Form 941 reporting. The IRS noted that employers will be reporting the postponement of the employee’s share of Social Security on Form 941 similarly to how employers currently report the deferral of the employer’s share of Social Security (see Payroll Guide ¶20,908). The postponed employee’s share of Social Security tax and deferred employer’s share of Social Security will be reported on line 13b with the postponed employee portion broken out on line 24 in Part 3 of Form 941. The IRS anticipates the final version of Form 941 to be available late September in time for the filing in October.
There will be no schema changes for the 3rd quarter of Form 941. The same elements will be used with new data populations.
Questions & Answers
Repayment of postponed employee tax. The IRS noted that the repayment process will be similar to the repayment process for the deferral of employer’s share of Social Security tax. The IRS is currently working on guidance on this issue. Rather than a tax deposit, an employer would receive a notice.
Employee requests opt-in. A caller asked whether an employer is required to elect the postponement if an employee requests the relief. The IRS emphasized the postponement is optional and while nothing bars an employer from considering employee input, the employer remains the “Affected Taxpayer” and is not required to use the relief even upon an employee’s request.
Further guidance. When asked if further guidance would be issued on the topic, perhaps in the form of FAQs, the IRS replied that taxpayers with questions have been calling the Notice 2020-65 Hotline at (202) 317-5436. The hotline now features some answers to frequently asked questions. The IRS is looking into ways to get the information out as quickly as possible.
W-2 reporting. Two questions came up regarding W-2 reporting: (1) how postponed amounts would be reported; (2) how to report unrecovered tax for a terminated employee questioned about how the postponed is reported on Form W-2. The IRS stated it is currently working on W-2 guidance. However, it did note that if an employer should end up paying the tax without employee withholding, regular employment tax law would kick in. Like a gross-up, the amounts would qualify as wages. The IRS is working out some instructions on this scenario.
Eligibility for postponement. A caller asked if an employee has Year-to-Date (YTD) wages of $104,000 and during September 1, 2020 through December 31, 2020, the employee has a biweekly pay period where they earned less than $4,000, would the employee be eligible for the postponement. The IRS reiterated that the applicable wages are determined on a pay period basis and the YTD wages would not be considered.
Future forgiveness of postponed taxes. When asked if an employer elects not to use the relief, and Congress passes legislation that forgives the employee’s share of Social Security tax that was postponed, will amounts be refunded to employees. The IRS said it could not comment on the future impact of legislation.
2021 Form 941 reporting. The IRS confirmed that remitted 2020 postponed amounts as provided by a notice from the IRS would not be reported on the 2021 Form 941 or any other 2021 return.
Multiple pay periods. The IRS advised that employers think through the nuances of their pay structures and how the postponement would apply to a particular payment. For example, if an employee is on a bi-weekly pay period for wages and receives a quarterly commission check, the employer should determine eligibility on a pay period basis. The IRS emphasized that employers should do the best possible in applying the Notice.
One-off bonus. When asked about one-off bonuses, the IRS stated supplemental wages were not addressed in the Notice but some questions that may be guiding are whether the bonus has a separate pay period and what the equivalent amount is in terms of the threshold.
Schedule B reporting. The IRS noted that tax liability for a pay period are not impacted if an employer decides to elect the postponement. Because Schedule B refers to liability and not payments, employers should continue to enter the total tax liability for the period. Liability arises at the time when wages are paid. The IRS emphasized that the Presidential Memorandum authorized a postponement of the due date to withhold and pay and does not defer taxes.
Postponement for payment. A caller asked if it was possible to postpone the payment while not postponing the withholding. The IRS explained that the relief is for the withholding and payment of taxes. The IRS stated it would seem that if the relief is not taken for withholding, then relief would not be available for the payment.
While this guidance and the answers above will be helpful to many employers it needs to be understood that comments and answers provided by the IRS during this teleconference while helpful do not have the authority of law of even represent official guidance. In the coming weeks and months we expect the IRS will issue additional official notices and regulations on this subject matter.
08/29/2020 – Last night the IRS Issued Notice 2020-65 dealing with the employee social security tax deferral announced by the president on August 8, 2020, in a Memorandum to the Secretary of State. The Memorandum directed the Secretary of the Treasury to use his authority, pursuant to section 7508A of the Internal Revenue Code, to defer the withholding, deposit, and payment of certain payroll tax obligations. These obligations are the employee portion of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a).
While the notice answers some questions it still leaves many questions unanswered and the deferral period starts only a few days from now.
What We Know From the Notice:
The deferral period is Sept 1, 2020 thru December 31, 2020 and it applies only to eligible employees that earn less than $4,000, bi-weekly or the equivalent amount based on their pay period, calculated on a pre-tax basis.
For qualifying workers, the deferral applies to the employee’s portion of Social Security taxes. This is the 6.2% of the total 7.65% of FICA taxes withheld from employees. The deferral does not affect the 1.45% that is designated for Medicare.
The Notice defines Affected Taxpayers not as employees, but as employers! It goes on to say “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.” This means the repayment obligation is the responsibility of the employer and that the employer will be responsible for any interest and penalties on amounts not repaid.
It also makes clear that it is the employer’s responsibility to collect these deferred taxes from employees who participated in the deferral.
What We Don’t Know From the Notice:
The Notice doesn’t address what happens when an employee leaves the company or doesn’t make enough money to ratably pay back the tax, but it would appear that the obligation to make those payments remains with the employer.
It’s also fails to explain how this will be reported for tax purposes. We can only assume we’re going to see a revamped version of Form 941 (that’s a payroll tax form).
Also missing are any provisions for the self employed and it appears that self employed individuals have been purposely excluded.
Another very important missing item is a clear answer to the question of whether or not the deferral is optional, and if so, is it optional on the part of the employer or employee? While Treasury Secretary Mnuchin, has said that it would be optional, the notice contained no reference to this statement by the Secretary.
As you can see this notice is not the clear definitive statement that anyone wanted and with only days left until the deferral is scheduled to go into effect, those of us in the tax profession are left to argue over how we think things will shake out with very few definitive answers to many tough questions.
Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf
Presidential Memorandum on Deferring Payroll Tax https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/
The Commissioner of the Internal Revenue Service, Charles Rettig, testified before the Senate Finance Committee. His message was a clear one: He is an enforcement-minded commissioner and “the IRS is committed to pursuing those who . . . intentionally evade their tax obligations.” Mr. Rettig did not mince words. His IRS will “aggressively pursue non-compliant taxpayers . . . with visible civil and criminal enforcement efforts.” But the message, though a stern one, is also one of fairness: Honest taxpayers need to believe—to feel confident—that others are paying their fair share, whether voluntarily or through enforcement efforts.
The CARES Act has the following provisions effecting the federal taxes on payroll and payroll tax withholding. These provisions deal with employer payments for student loan repayments, as well as changes in terms of permitted benefits under health savings accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). Other federal withholding provisions of interest to employers during the COVID-19 public health emergency include employer-provided disaster relief payments and donate leave programs.
Each of these provisions are outlined below:
- Employers may provide student loan repayment assistance
The CARES Act allows employers that provide student loan repayment benefits to employees to do so on a tax-free basis and such payments may be excluded from the employee’s income. This benefit is available through Dec. 31, 2020. The payment is subject to the same $5,250 annual cap available under Code Sec. 127 for tuition, books, fees and supplies.
- Benefit plan provisions amended during COVID-19
The CARES Act ensures individuals are able to use all tax-favored health care accounts, like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), to buy over-the-counter medicines tax-free without a prescription. This change would apply for amounts paid or expenses incurred after Dec. 31, 2019. In addition, Sections 3703 and 3704 explain that high deductible health care plans with HSAs will be able to provide coverage for telehealth services without having to satisfy the plan’s minimum deductible.
- Employer may provide disaster relief payments
Due to the Presidential Disaster declared for all 50 states for Covid-19, employers may make qualified disaster relief payments to employees impacted by the COVID-19 public health emergency. Qualified disaster relief payments, under this provision, made to an employee by an employer may be excluded from the employee’s taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair/replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.
- Employers may administer a donated leave program
Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met. Leave donated by employees to an employer-sponsored leave bank under a major disaster leave-sharing plan is not taxable for the leave donor if certain requirements are met. Amounts paid to medical emergency leave bank recipients are taxable employee compensation and subject to FITW, FICA, and FUTA. Employees who surrender or deposit their time in the leave bank do not realize any income and incur no deductible expense or loss
- COVID-19 added as adverse condition for foreign income and housing exclusions.
Waives the required residency period for qualifying individuals with a tax home in a foreign country to use the foreign income and housing exclusion. The law added to the already existing conditions for waiver for Covid-19. For 2019 and 2020, for purposes of Code Sec. 911(d)(4), the coronavirus pandemic (“COVID-19 Emergency”) is an adverse condition that precluded the normal conduct of business as follows: (1) in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of Dec. 1, 2019; and (2) globally, as of Feb. 1, 2020. The period covered by Rev Proc 2020-27 ends on July 15, 2020, unless an extension is announced by the Treasury and IRS.
- IRS revises trust fund penalty assessment procedures
Due to Covid-19 and the shutdown of many IRS offices and services centers the IRS is directed to delay the assessment of the trust fund penalty on individuals responsible for the collections and payment of payroll taxes withheld and not deposited to the U.S, Treasury. Said delays are only available when no imminent statute or exigent circumstances exist.
- IRS provides deadline relief for correcting employment taxes and other time-sensitive actions.
Deadlines extended to July 15. The IRS has now postponed deadlines for certain specified time-sensitive actions on account of the ongoing COVID-19 pandemic.
Notice 2020-35, 2020-25 IRB extends tax deadlines to July 15, 2020 for the following: (1) employers correcting employment tax reporting errors using the interest-free adjustment process; and (2) employers correcting employment tax underpayments or overpayments.
- IRS provides guidance on leave-sharing program to aid COVID-19 victims
Under an employer leave-based donation program, employees elect to forgo vacation, sick, or personal leave in exchange for cash payments an employer makes to organizations described in Code Sec. 170(c).
The IRS will not consider any cash payments an employer makes to a Code Sec. 170(c) organization in exchange for vacation, sick, or personal leave that employees donate to be gross income or wages if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of COVID-19; and (2) paid to the Code Sec. 170(c) organizations before Jan. 1, 2021.
Similarly, the IRS will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages to the employees. Electing employees may not claim a charitable contribution deduction under Code Sec. 170(c) with respect to the value of forgone leave excluded from compensation and wages.
All of the information contained herein is intended to provide information on options and updates created by the CARES ACT and other changes effecting the payroll taxes and withholding. Each topic is covered in summary form only and it should not be considered tax or accounting advice. Before taking action it’s important to review all information regarding the provision and to consult a tax professional.
In consultation with the Treasury Department, the Small Business Administration (SBA) has released a set of Frequently Asked Questions (FAQs) addressing forgiveness of Paycheck Protection Program (PPP) loans. The FAQs provide guidance on general loan forgiveness, payroll costs, nonpayroll costs, and reductions to a borrower’s forgiveness amount. Among other things, the FAQs provide examples on how to calculate the amount of forgivable compensation for owners of C corporations, S corporations, self-employed Schedule C (or Schedule F) filers, general partners, and LLC members. In addition, the FAQs clarify that payments of transportation utility fees assessed by state and local governments are eligible for loan forgiveness. According to the SBA, borrowers and lenders may rely on the FAQs. For more information, see www.sba.gov/document/support-frequently-asked-questions-ppp-loan-forgiveness .
President Uses Executive Orders Too Authorize Extending Unemployment Benefits and More
President Trump signed four executive orders Saturday. These orders provide additional jobless benefits, suspend the collection of payroll taxes, avoid evictions and assist with student-loan payments.
Here is a breakdown of the Executive Orders:
The administration plans to roll out a $400 weekly payment, funded 75% by the federal
government and 25% by states. It remains unclear if the states will go along with this plan, given that many of them are facing budget shortfalls due to the coronavirus-sparked recession.
Under the executive action the additional jobless benefits will be paid from the Disaster Relief Fund, the government’s primary source of money to pay for emergency costs. The extra weekly benefits would be available until December 6, 2020, or until the disaster fund’s balance drops to $25 billion, according to the executive action.
This executive order directs the Department of Treasury and the Department of Housing and Urban Development (HUD) to identify funds to provide temporary financial assistance to renters and homeowners who are struggling to meet their monthly rental or mortgage obligations. The order also directs HUD to take action to “promote the ability of renters and homeowners to avoid eviction or foreclosure.”
It falls short however, of reauthorizing the eviction moratorium set in the Cares Act which expired at the end of July. The moratorium applied only to properties with government-backed mortgages, covering just one-third of renters. Pressure is mounting in Washington to find a way to prevent a wave of evictions—and the resulting domino effect of defaults and foreclosures by landlords.
Regulators could potentially instruct the government-sponsored mortgage corporations Fannie Mae and Freddie Mac to offer landlords forbearance on their monthly mortgage payments if their tenants are unable to pay rent, assuming they do not evict their tenants. But Fannie and Freddie are overseen by the Federal Housing Finance Agency (FHFA), which is an independent government agency. The executive order directs the FHFA to “review all existing authorities and resources that may be used to prevent evictions and foreclosures for renters and homeowners.”
Other government housing agencies such as the Federal Housing Administration (FHA) do fall under the President’s authority and could potentially be used to help prevent evictions, however, FHA is not technically permitted to spend money without it being appropriated by Congress.
The President directed the Treasury Department to defer the 6.2% Social Security tax on wages for employees making less than about $100,000 a year. That suspension would last from Sept. 1 through Dec. 31. Under the executive order the taxes would still be due by employers and employees. The President said he would press Congress to revert the deferral into an actual tax cut.
The tax code gives the Treasury Secretary authority to delay tax filing and collection after presidentially declared disasters. The administration already used this authority to postpone a series of spring tax deadlines until July 15 and used it again Friday to delay some excise-tax collections. It is far from certain that many employers will stop withholding payroll taxes given the potential for future liability.
Student Loan Payment
The Cares Act gave borrowers with federal student loans a six-month suspension of their monthly payments, interest-free. The law applied to roughly 35 million borrowers whose loans are held by the federal government. However, the law excludes about eight million borrowers whose loans are held by private lenders with a government guarantee. This payment moratorium is set to expire September 30. Saturday’s executive order would extend the payment moratorium and zero-interest until the end of the coronavirus crisis.
For those wanting to know what all this means right now we can’t be sure just how things will shake out. Open questions include: will court actions delay, or cancel any of these orders? Will some all or none of the states go along with the requirement to pay 25% of the expanded and yet reduced federal unemployment benefits? Just how will these orders be implemented?
It will take time for more information, along with rules and regulations to be propagated that spell out just how to take advantage of the benefits covered by the executive orders, so stay tuned to our website as we will do our best to keep you informed.
Having trouble making payments on a loan from a qualified employer pension or retirement plan?
The CARES Act may just have provided you with the perfect solution, allowing you to avoid losing the tax deferral and being subject to the early withdrawal penalty.
The CARES Act temporarily liberalizes the plan loan rules in two key ways:
1) Loan payments that would otherwise be due between March 27, 2020, and December 31, 2020, can be suspended for up to one year. Payments due after the suspension period will be adjusted to reflect interest that accrued during the suspension period.
2) For plan loans made between March 27, 2020, and September 22, 2020, the maximum loan amount can be increased to the lesser of: a) $100,000 minus any existing plan loan balances, or b) 100% of the participant’s vested account balance or benefit.
So if you can’t make payments on a retirement or pension plan loan, due to a loss of income, furlough or other reason, the sooner you contact your plan administrator the better.