IRS FAQs Provide Welcome Guidance on Employee Retention Credit and PPP Loans in M&A Transactions

On November 16, the IRS added two new FAQs to its website that address an issue that has been concerning employers since the CARES Act was adopted.  For purposes of the employee retention credit (“ERC”), Section 2301(d) of the CARES Act includes an aggregation rule that treats all employers required to be aggregated under section 52 of the Code or certain provisions of section 414 of the Code to be treated as a single employer.  (See earlier coverage of the aggregation rule.)  Because the CARES Act also prohibits any employer who receives a Paycheck Protection Program (“PPP”) loan (regardless of whether the loan is forgiven) from claiming the ERC.

Based on the statutory language, practitioners have been concerned that if an employer acquires another employer that previously received a PPP loan, the acquirer’s entire aggregated group may no longer be eligible to claim the ERC.  More troubling, Section 2301(l)(3) of the CARES Act instructs the Treasury to promulgate regulations for the recapture of the ERC claimed by an employer that subsequently obtains a PPP loan.  This caused concerned that the acquirer could not only lose the ability to claim the ERC prospectively after the acquisition, but could be required to repay any amount or ERC previously claimed.  Although the new FAQs are not binding on the IRS, they prove welcome news. Continue Reading

Preamble to Final Regulations on the Mechanics of Income Tax Withholding Provide Transition Method for Pre-2020 Forms W-4

On October 6, the IRS published final regulations addressing changes made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) to how an employee instructs an employer to withhold income taxes based on the employee’s Form W-4 (Employee’s Withholding Certificate).  These final regulations were issued only 8 months after the proposed regulations were published (see earlier coverage), which is considered warp-speed in IRS time. The Preamble to the final regulations provide a new method for employers who must continue to rely on pre-2020 Forms W-4 to determine the amount of federal income tax to withhold from employee’s wages. Continue Reading

IRS Provides Guidance on Preparation of Forms W-2 for Employees with Deferred Social Security Tax Withholding

On Friday, October 30, the IRS provided guidance regarding the proper reporting on Form W-2 for employers who deferred the withholding of the employee share of Social Security tax under Notice 2020-65. (See earlier coverage.)  Based on the IRS guidance, employers should report FICA wages up to the OASDI (Social Security) wage base in Box 3 of the 2020 Form W-2.  Only the amount of Social Security tax actually withheld during 2020 should be reported in Box 4 of the form.

In 2021, if the employer withholds the 2020 deferred Social Security taxes, the employer must file a Form W-2c for 2020 reporting the additional withholding in Box 4.  Although the IRS guidance does not address this, if the employer pays in 2021 the employee’s share of Social Security taxes that were deferred in 2020, the employer must still file a Form W-2c reporting the amount as withheld Social Security taxes in Box 4.  Moreover, the employer would also be required to include the amount of taxes paid by the employer on the employee’s behalf as additional wages in Boxes 1, 3 (up to the OASDI wage base), and 5 on the employee’s 2021 Form W-2.  Because the employer’s payment of the employee’s deferred tax constitutes additional wages to the employee in 2021, these amounts will need to be grossed up to account for employment taxes on the amount of the employee’s tax paid by the employer if those taxes are not withheld from the employee’s other 2021 wages. Continue Reading

New D.C. Transportation Benefits Law Creates Potentially Bumpy Road for Employer Compliance

Soon, many District of Columbia employers will be subject to a new “parking cash-out” law designed to promote environmentally friendly commuting options, i.e., other than individual commutes by automobile.  At a high-level, parking cash-out laws generally require employers that provide free or subsidized parking to offer to pay employees cash in lieu of the subsidized parking if the employee uses another commuting method. Failure to satisfy the act’s requirements may result in the imposition of civil fines and penalties.

The Transportation Benefits Equity Amendment Act of 2020 (the “Act”) became effective June 24, 2020, but originally contained a funding provision that delayed its operational effect.  Similar legislation has been in place in some areas for over 20 years.  The D.C. Council has since repealed the funding provision, and we expect the Act’s requirements to take effect in mid-November 2020.  The timing of the Act’s adoption has raised some eyebrows, as many employers and employees are seeking ways for employees to commute that avoids crowded public transportation in light of the ongoing COVID-19 pandemic.

As this post discusses, the Act’s requirements pose difficult compliance questions for employers.  Guidance would be welcome in helping employers implement the Act, and will hopefully be forthcoming soon.  Employers are encouraged to consult with tax and benefits counsel as they evaluate their fringe benefit programs for compliance with the Act. Continue Reading

IRS Updates Guidance on Qualified Plan Distributions to State Unclaimed Property Funds

The IRS recently published new guidance on the tax withholding and reporting consequences associated with qualified retirement plan distributions to state unclaimed property funds.  In Revenue Ruling 2020-24, the IRS clarified that distributions from qualified retirement plans to state unclaimed property funds are subject to both federal income tax withholding and 1099-R reporting requirements.  In a companion revenue procedure, Rev. Proc. 2020-46, the IRS permitted taxpayers to self-certify for a waiver of the 60-day deadline for rolling over funds between qualified plans when the funds had been distributed to a state unclaimed property fund.

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Bad News for New York Nonresident Telecommuters: New York Issues COVID-19 Telecommuting Guidance

Without notice or fanfare, the New York Department of Taxation updated guidance on its website to address the application of its “convenience of the employer” rule to COVID-19 telecommuters.  The question of whether New York would consider employees who are working remotely due to the pandemic as doing so for “convenience” or “necessity,” has been vexing employers and employees since April.  New York’s latest update, which is disappointing but not surprising, has come down on the side of convenience.  As a result, an employee whose principal office is in New York State but who is working outside of the state during the pandemic will generally remain subject to New York State income tax, and the employer should generally continue to withhold New York State tax from the employee’s compensation. Continue Reading

New Hampshire Brings COVID-19 Tax Dispute to Supreme Court; Case Highlights Challenges Facing Employers and Employees

On Monday, October 19, the State of New Hampshire filed a bill of complaint in the Supreme Court of the United States asserting that its southern neighbor, Massachusetts, is violating its state sovereignty.  The suit attacks Massachusetts’s emergency regulations governing the taxation of income during the COVID-19 state of emergency. Massachusetts enacted a rule pursuant to which income earned by a nonresident of Massachusetts who worked in Massachusetts prior to the pandemic but who is working from home outside of the state remains Massachusetts-source income subject to Massachusetts income tax.  Accordingly, employers would be required to continue to withhold Massachusetts income tax on wages paid to those individuals even though the individuals are no longer working in Massachusetts.  Although the Massachusetts guidance is among the most sophisticated and detailed withholding guidance issued by the states during the pandemic, it is not alone in taking this approach.  Rhode Island issued regulations substantially similar to Massachusetts, and the Pennsylvania Department of Revenue has issued similar guidance in the form of FAQs posted on its website.  Other states have hinted at taking a similar approach, but the guidance is often vague and left open to interpretation. Continue Reading

Final Regulations Address TCJA Disallowance for Meal and Entertainment Expenses

On October 9, the IRS published final Treasury Regulations addressing the deduction disallowance of expenses associated with providing entertainment, business meals, and other food and beverages in the Federal Register.  The final regulations, which track the proposed regulations published on February 26, 2020, preserve, with certain limitations, taxpayers’ ability to deduct 50 percent of the cost of business meals, even though the Tax Cuts and Jobs Act (“TCJA”) repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenditures.  Treasury Regulation § 1.274-11 addresses the deduction disallowance under Section 274(a)(1) for entertainment costs.  Treasury Regulation § 1.274-12 addresses the limitations on food or beverage expenses under Sections 274(k) and (n), including the application of exceptions in Section 274(e).

The TCJA’s elimination of a taxpayer’s ability to deduct 50 percent of meal and entertainment expenses meeting the directly related and business discussion exceptions took effect for tax years beginning after December 31, 2017.  In 2018, IRS Notice 2018-76 provided transitional guidance on the deductibility of expenses for certain business meals and other food and beverage expenses under Section 274(a)(1).  The proposed regulations largely adopted the guidance provided in Notice 2018-76, while also providing some significant updates.  The final regulations made only a few substantive changes to the proposed regulations.

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IRS Posts Tax Tip on Backup Withholding

On October 14, 2020, the IRS posted Tax Tip 2020-136 entitled, “Helpful information for taxpayers on backup withholding.”  This particular Tax Tip serves as a great reminder for payers making payments for which backup withholding is required, especially if they are unaware of the troubling consequences of noncompliance. Continue Reading

OASDI (Social Security) Wage Base Up Over 3.7% for 2021

On October 13, the Social Security Administration announced that the Old Age, Survivors, and Disability Insurance (“OASDI”) wage base will increase to $142,800 for 2021.  The 3.7% increase follows a 3.6% increase in the wage base for 2020 and a 3.5% increase for 2019.  Wages in excess of the wage base paid by an employer to an employee are not subject to social security tax.  As a result of the increase, the maximum amount of social security tax paid by an employee in 2021 will be $8,853.60, an increase of $316.20 from 2020.  The maximum amount of social security tax paid by an employer for an employee in 2021 will increase by the same amount.

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