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For employers who decided to defer the employee share of Social Security taxes on wages paid from September 1 to December 31, 2020, pursuant to President Trump’s August 8 presidential memorandum, the employer’s obligation to collect those deferred amounts from employees’ paychecks is fast approaching.  Included among our previous posts discussing the deferral, which was voluntary, is a discussion of IRS Notice 2020-65.  The notice specifies that the employer “must withhold and pay the total [deferred 2020 taxes] . . . ratably from wages . . . paid between January 1, 2021, and April 30, 2021” and further warns that “if necessary, the [employer] may make arrangements to otherwise collect the total [deferred taxes] from the employee.”  (See earlier coverage.) …
Continue Reading Unpleasant Surprise May Await Employers That Deferred Employee Social Security Tax

Yesterday, December 9, the IRS released final regulations implementing the Section 274(a)(4) and 274(l) deduction disallowances, adopted as part of the 2017 Tax Cuts and Jobs Act.  Section 274(a)(4) disallows employer deductions for the cost of providing qualified transportation fringe (“QTF”) benefits provided to employees.  Section 274(l) provides a broader deduction disallowance for expenses paid for, or to reimburse for, employees’ trips between their residences and their places of employment.  Both deduction disallowances took effect for tax years beginning after December 31, 2017.

The final regulations largely follow the approach taken in the proposed regulations issued in June, which built on earlier guidance provided in Notice 2018-99.  Treasury Regulation § 1.274-13 addresses the deduction disallowance under section 274(a)(4) for the cost of QTFs provided under section 132(f), such as qualified parking, transit passes, and other tax-free commuting benefits.  Treasury Regulation § 1.274-14 addresses the deduction disallowance under section 274(a).
Continue Reading IRS Issues Final Regulations on Commuting Expenses Deduction Disallowances

As previewed by the recent final Form W-4 regulations published in October (see earlier coverage), the IRS released a draft of Publication 15-T (Federal Income Tax Withholding Methods) on November 17.  The publication provides a new computational method for employers who must continue to rely on pre-2020 Forms W-4 to determine the amount of…

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

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

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

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

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.…

Continue Reading Final Regulations Address TCJA Disallowance for Meal and Entertainment Expenses

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 IRS Posts Tax Tip on Backup Withholding

On October 2, 2019, Treasury and the IRS issued proposed regulations relating to the repeal of section 958(b)(4) by the Tax Cuts and Jobs Act (“TCJA”).  On September 22, 2020, Treasury and the IRS issued final regulations largely following the proposed regulations, along with additional proposed regulations.
Continue Reading Regulations Addressing Section 958(b)(4) Repeal Provide Relief for U.S. Payors but Hold the Line on the Portfolio Interest Exception