Some Employers Must Act Immediately to Take Advantage of CARES Act Social Security Tax Deferral for Deposits Made Early in the Second Quarter

The IRS recently released a second set of draft instructions for Form 941, Employer’s Quarterly Federal Tax Return.  The IRS also released the final Form 941, which was revised significantly from the prior form to accommodate the employer social security tax deferral and employer social security tax credits enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the Families First Coronavirus Response Act (“FFCRA”).  The final Form 941 is identical to the draft Form 941 released in April. To take full advantage of the employer social security tax deferral, however, some employers must take immediate steps within the next several days and in some cases, no later than today depending upon their pay cycles and when they implemented the deferral. Continue Reading

IRS Revises Administrative Waiver for Late Deposit Penalties Arising from Employment Taxes on Stock Options, SARs, and RSUs

The IRS has shortened the time in which employers must deposit payroll taxes related to certain stock-settled awards issued to employees, in order to be eligible for an administrative waiver of late-deposit penalties.  Through a non-publicized change to its Internal Revenue Manual, the IRS has shortened the applicable deadline for depositing owed and accumulated employment taxes related to stock-settled awards from three business days after exercise (T+3) to two business days after exercise (T+2), while also expanding the administrative waiver’s applicability to additional types of awards.  This change occurred a mere eight days after General Legal Advice Memorandum, GLAM 2020-004, which we discussed earlier this month, was issued to IRS Examination explaining the timing of income rules and the deposit requirements applicable to certain stock-settled awards, as well as the history of the long-standing administrative waiver dating from 2003. Continue Reading

Proposed Regulations Regarding TCJA Disallowance for Employee Commuting and Parking Costs a Mixed Bag

On June 23, Proposed Treasury Regulations §§ 1.274-13 and 1.274-14 were published in the Federal Register addressing the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees.  The proposed regulations are a mixed bag with some clarifications being helpful and others less so.  Proposed Treasury Regulation § 1.274-13 addresses the deduction disallowance under section 274(a)(4) for the cost of qualified transportation fringe benefits (QTFs) provided under section 132(f), i.e., qualified parking, transit passes, and other tax-free commuting benefits.  Proposed Treasury Regulation § 1.274-14 addresses the deduction disallowance for employee transportation costs under section 274(l).  Both deduction disallowance provisions were adopted as part of the Tax Cuts and Jobs Act (“TCJA”), and took effect for tax years beginning after December 31, 2017. Continue Reading

Paycheck Protection Flexibility Act Becomes Law; Extends Employer Social Security Tax Deferral for PPP Loan Recipients

Earlier today, President Trump signed the Paycheck Protection Flexibility Act (“PPFA”), making certain changes to the Paycheck Protection Program enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in March.  Section 4 of the PPFA amends Section 2302(a) of the CARES Act to delete section 2302(a)(3).  Accordingly, employers who obtain forgiveness of a Paycheck Protection Program (“PPP”) loan may now defer all employer social security tax deposits that would otherwise be required to be deposited before January 1, 2020. Continue Reading

Much Ado About Nothing Much New: IRS Releases GLAM Addressing Payroll Taxation of Equity Compensation

On May 22, 2020, the IRS released a Generic Legal Advice Memorandum, GLAM 2020-004, which addresses the timing of the taxation and withholding of payroll taxes on certain stock-settled awards issued to employees.  Specifically, the GLAM focuses on the treatment of stock options, stock-settled stock appreciation rights (SARs), and stock-settled restricted stock units (RSUs).

Employers should be aware that the GLAM does not appear to alter the Service’s existing position with respect to such awards—the fair market value of the stock underlying the award is includible in gross income when the stock is deemed transferred to the employee.  However, the GLAM does appear to offer some additional insight into the timing of income inclusion with respect to RSUs.  Perhaps most importantly, the GLAM reiterates the IRS’s 2003 administrative position regarding the application of late deposit penalties to payroll tax deposits due on the exercise of nonqualified stock options.  A question had arisen regarding whether SEC guidance shortening the standard settlement cycle for securities transactions to two business days had the effect of shortening the period for depositing payroll taxes.  Deposits owed with respect to option exercises will continue to be deemed timely if deposited within one day of settlement, so long as settlement occurs within three days of the exercise date. Continue Reading

IRS Adds Employment Tax Corrections to Expanding List of Postponed Time-Sensitive Actions Due to COVID-19

On May 28, 2020, the IRS issued Notice 2020-35, postponing deadlines for more time-sensitive actions until July 15, 2020.  Notice 2020-35 is the latest in a series of IRS notices issued since mid-March providing for delays under the authority of section 7508A due to the COVID-19 emergency declaration.  Specifically, the relief relates to employment tax returns and returns filed by employee benefit plans exempt organizations due on or after March 30, 2020, and before July 15, 2020.  The big news arising out of the notice—although certainly not broadcast by the IRS—pertains to the extension of the period for correcting errors that occurred in prior calendar years until July 15, 2020.  This extension of time until July 15, 2020, permits employers to correct errors ascertained with respect to calendar year 2016 employment taxes, which ordinarily would have to have been corrected on or before April 15, 2020—the day on which the period of limitations would otherwise have lapsed. Continue Reading

IRS Provides COVID-19 Emergency Relief for Individuals Planning to Claim the Foreign Earned Income Exclusion

Prompted by the COVID-19 global health emergency (the “COVID-19 Emergency”), Treasury and the IRS recently issued Rev. Proc. 2020-27 to provide relief for U.S. citizens and residents planning to take advantage of the foreign earned income exclusion under section 911 of the Internal Revenue Code whose expatriate assignments were interrupted due to the pandemic.  The Revenue Procedure waives the time requirements of section 911(d)(1) for those individuals who reasonably expected to meet such requirements during 2019 and 2020, but for the COVID-19 Emergency interrupting normal business activities and forcing their return to the United States within certain time periods identified in the Revenue Procedure. Continue Reading

IRS Provides Relief for Nonresidents Unable to Depart U.S. Due to Pandemic

On March 13, 2020, the President issued a proclamation declaring a national emergency regarding the global outbreak of the COVID-19 virus (the “COVID-19 Emergency”).  Subsequently, FEMA approved all states and the District of Columbia for major disaster declarations to provide federal emergency assistance.  The Federal Government and state governments have also taken unprecedented preventative and proactive measures to slow the spread of COVID-19 by instituting stay-at-home orders and significantly curtailing travel.  These restrictions have caused concerns regarding the application of the U.S. tax residency rules to nonresidents who are unable to leave the United States due to the state of emergency.  In response, Treasury and the IRS issued Rev. Proc. 2020-20 to provide important relief under the substantial presence test for nonresidents unable to travel due to the COVID-19 Emergency. Continue Reading

IRS Reverses Course on Health Plan Expenses for Furloughed Employees

On May 7, the IRS updated its frequently asked questions to reverse its earlier determination that health plan expenses paid or incurred by an employer to provide health benefits to furloughed employees who were not paid other wages were not qualified health plan expenses for which an employer could claim the employee retention credit.  The IRS revised Q&A-64 and Q&A-65 after the guidance came under bipartisan criticism from both Senate Finance Committee and House Ways and Means Committee leadership.  Senators Grassley and Wyden, chair and ranking member of the Senate Finance Committee, and Representative Neal, chair of the House Ways and Means Committee, sent a letter to Treasury Secretary Mnuchin on May 5 urging Treasury and the IRS to change its position.  The guidance came as a surprise because it conflicted with the Joint Committee on Taxation report that indicated such expenses were intended to be treated as eligible for the employee retention credit.  Left unchanged by Treasury and the IRS is the distinction between payments made to furloughed employees and severance paid to terminated employees (see earlier article).

IRS Clarifies that Employers Who Repay PPP Loans May Claim Retention Credit

On May 4, the IRS revised its newly released frequently asked questions (“FAQs”) to clarify the interaction of the Paycheck Protection Program (“PPP”) with the employee retention credit.  FAQ 79 now indicates that an employer that repays its PPP loan by May 7, 2020, in accordance with rules issued by the Small Business Administration (“SBA”), the employer will be treated as though it had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit provided the employer is otherwise an “eligible employer.”

In our article of April 30, we highlighted a concern that the shifting PPP terms combined with media attention and a public outcry had led many employers who “received” a PPP loan to repay them during a safe harbor period for repayment under SBA rules.  Because the FAQs did not address the issue, we were worried that some employers might be left ineligible for both the PPP and the retention credit.  That may still be true for employers who are required to be aggregated with another employer who received a PPP loan, but will no longer be a concern for those who received a PPP loan, and repaid it by May 7, 2020.

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