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Employers Can Defer Employment Tax Deposits Until Paycheck Protection Program Loan Is Forgiven

Posted on April 2020 by info

The IRS has issued frequently asked questions (FAQs) on the payroll tax deferral opportunity provided by the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (Public Law 116-136). Under that provision, employers of all sizes (including tax exempt/non-profit employers) can defer the deposit and payment of the employer’s share of Social Security taxes. Self-employed individuals can also defer payment of some self-employment taxes.

Background

To help employers conserve cash while retaining their workforce, Section 2302 of the CARES Act allows all employers to defer depositing the employer’s share of Social Security taxes for payments due from March 27 (CARES Act enactment date) through December 31, 2020. Generally, employers are required to deposit timely 6.2% of employee wages up to $137,700 (which is the 2020 Social Security wage base), along with 1.45% of Medicare (or “hospital insurance”) taxes (with no wage base cap). But Section 2302 of the CARES act allows employers to defer depositing the 6.2% of wages, interest-free and penalty-free. Payment of half of the amount deferred is due on December 31, 2021, and the remainder is due on December 31, 2022.

Insight

Employers’ 1.45% Medicare tax cannot be deferred under the CARES Act and must be deposited unless it is being used to offset payroll tax credits allowed under the CARES Act or the Family First Coronavirus Response Act.
There is no application form or approval procedure to use the payroll tax deposit deferral. Rather, employers simply do not remit the amount that would otherwise be due. IRS will update the Form 941 for the second quarter of 2020 to track the deferred deposits.
While not addressed by the IRS in the recent FAQs, it appears that an employer who paid their social security tax liabilities due on or after March 27 could take advantage of the full deferral amount allowed by recovering the previously paid, but not required, amounts from other 2020 federal tax deposits. Employers using third party payroll-providers should discuss system capabilities and procedures for taking advantage of the allowed deferral and the possibility of recovering any previously paid amounts that were eligible for deferral.

Coordination With PPP Loan Forgiveness

There was some confusion over whether employers who obtain a Paycheck Protection Program (PPP) Small Business Administration (SBA) loan could use the payroll tax deferral, since Section 2302 of the CARES Act states that employers who obtain forgiveness of a PPP loan may not defer deposit of payroll taxes. The FAQs clarify that employers who obtain PPP loans may defer deposit of payroll taxes until such time that the employer receives a decision from its lender that all or any portion of their PPP loan is forgiven.

Once loan forgiveness has occurred, the employer must resume timely payroll tax deposits. The FAQs confirm that the amount that was deferred through the date that the loan was forgiven will continue to be deferred. Accordingly, half of the deferred amount will be due on December 31, 2021, and the other half will be due on December 31, 2022.

Insight

To maximize the payroll tax deferral opportunity, employers with PPP loans may wish to consider delaying their request for PPP loan forgiveness until December 31, 2020. PPP loans are for two years, at 1% interest and do not require any payments during the first six months. Employers can request PPP loan forgiveness for qualified payroll costs and certain other expenses incurred during an eight-week period beginning on the date they receive the loan proceeds (lenders must disburse proceeds within 10 days after the loan is approved). Lenders generally have up to 60 days to consider the loan forgiveness. There does not appear to be any time limit for when an employer could submit its request for loan forgiveness, and many will wait until after June 30, 2020, to take advantage of provisions that maximize loan forgiveness.

For example, if an employer submits a request for loan forgiveness on July 15, 2020, the lender could forgive the loan anytime through September 15, 2020. Assume the loan is forgiven on August 15, the employer could no longer defer payroll taxes from August 15 through December 31, 2020. But if the employer does not request loan forgiveness until December 15 (and assuming the lender does not forgive the loan until early 2021), the employer could continue deferring payroll taxes through December 31, 2020.

COVID-19 Postponement Relief Under Notice 2020-23 Expanded By IRS

Posted on April 2020 by info

On April 9,2020, the IRS issued Notice 2020-23, which contains expanded relief for those tax forms and other filings that are postponed as was originally announced last month. See the IRS Coronavirus website for more details.

First, the payments and returns eligible for relief are expanded. Any tax return or payment due on or after April 1, 2020, and before July 15, 2020, is now automatically postponed to July 15, 2020—no extension forms, letters, or other forms of documentation or communication are required to make use of this relief. This will now cover, for example, calendar-year 2020 second quarter estimated tax payments, among other things. If an Affected Taxpayer as defined by the notice needs additional time to file, such taxpayer may choose to file the appropriate extension form by July 15, 2020, to obtain a filing extension. However, the taxpayer’s extension date may not exceed the original statutory or regulatory extension date. For example, a taxpayer can file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by July 15, 2020, to extend the due date of their 2019 calendar year tax return (generally due on April 15, 2020). However, the extension granted will only be to October 15, 2020, which is the original extension date for 2019 calendar year individual tax returns.

Second, the IRS has expanded the forms that are now postponed. These forms now include: 1040-series, 1120-series, 1065, 1066, 1041, 706 (estate tax payments and returns), 709 (gift tax payments and returns), 8971, 990-T, and estimated tax payments. The relief includes not just the specified forms, but also all schedules, returns, and other forms filed as attachments, such as schedule H, schedule SE, and Forms 3520, 5471, 5472, 8621, 8858, 8865, and 8938.

Overview of Extensions Granted in Notice 2020-23
Type of Tax Return	Form ¹	2020 Deadline
Individual/Married Tax Return & Payments	Form 1040, 1040-SR, 1040-NR, 1040-NR- EZ, 1040-PR, 1040-SS	7/15/2020
Trust & Estate Tax Return & Payment	Form 1041, 1041-N, 1041-QFT	7/15/2020
Partnership Returns	Form 1065; Form 1066	7/15/2020
Corporation Tax Return & Payments	Form 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120- POL, 1120-REIT, 1120-RIC, 1120-S, 1120-SF	7/15/2020
United States Estate and Generation-Skipping Transfer Tax Return & Payment	Form 706; 706-NA, 706-A, 706-QDT, 706- GS(T), 706-GS(D), 706-GS(D-1)	7/15/2020
Form 706 Pursuant to Rev. Proc. 2017-34	Form 706	7/15/2020
Information Regarding Beneficiaries Acquiring Property from a Decedent	Form 8971	7/15/2020
United States Gift and Generation- Skipping Transfer Tax Return and Payment	Form 709	7/15/2020
Exempt Organization Business Income Tax Return & Payment	Form 990-T	7/15/2020
Excise Tax Payments on Investment Income & Payment	Form 990-PF; Form 4720	7/15/2020
Quarterly Estimated Income Tax Payments & Payments	Form 990-W; Form 1040-ES; 1040-ES (NR), 1040-ES (PR); Form 1041-ES; Form 1120-W	7/15/2020
Return of Organization Exempt from Income Tax ²	Form 990	7/15/2020
Annual Return/Report of Employee Benefit Plan²	Form 5500	7/15/2020

¹ – This relief includes not just the filing of specified Forms, but also all schedules, returns, and other forms that are filed as attachments to specified forms or are required to be filed by the due date of Specified Forms
²– This relief comes through Rev. Proc. 2018-58 for affected taxpayers with a time sensitive act which is due to be performed on or after April 1, 2020.

NOTE: The above list is not intended to be all inclusive. Rev. Proc. 2018-58 provides other disaster-related relief for time-sensitive actions and elections.

The period beginning on April 1, 2020, and ending on July 15, 2020, will be disregarded in the calculation for interest, penalty, or addition to tax for failure to file the forms or make payments that are temporarily postponed by Notice 2020-23. Such amounts will accrue starting on July 16, 2020.

Welcome Relief For Partnership Filings To Obtain CARES Act Benefits

Posted on April 2020 by info

General Rules for Amending Partnership Returns

Prior to 2018, partnerships were generally subject to unified partnership audit and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982, commonly referred to as the TEFRA partnership procedures.

For taxable years beginning after December 31, 2017, the Bipartisan Budget Act of 2015 (BBA) replaced the TEFRA audit procedures with a centralized partnership audit regime. These new audit procedures apply to all partnerships, unless the partnership makes a valid election not to have those procedures apply. Partnerships subject to the centralized partnership audit regime are referred to as BBA partnerships.

Partnerships file annual returns on Form 1065 each taxable year and report each partner’s distributive share of income, gain, loss, deduction and credit on Schedule K-1. Partnerships are required to furnish a copy of Schedule K-1 to each partner.

BBA partnerships are generally prohibited from amending the information required to be furnished to their partners after the due date of the return, unless specifically provided by the Secretary of the Treasury or his delegate. On April 8, 2020, the Internal Revenue Service issued Revenue Procedure 2020-23, which exercises that authority to allow a BBA partnership to file an amended partnership return and issue amended Schedules K-1 for taxable years that began in 2018 or 2019, and only under certain circumstances.

Impact of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act provides retroactive tax relief that affects partnerships, including relief for the taxable years ending in 2018, 2019, and, in some cases, 2020. Without the option to file amended returns, BBA partnerships that already filed their Forms 1065 for the affected years generally are unable to take advantage of the CARES Act relief for partnerships except by filing Administrative Adjustment Requests (AARs). Filing an AAR would result in the partners only being able to receive any benefits from that relief on the current taxable year’s federal income tax return. Thus, if an AAR were filed during 2020 affecting taxable years that began in 2018 or 2019, the partners generally would not be able to take advantage of CARES Act benefits from an AAR until they file their current year returns, which could be in 2021. In the view of the IRS, this process would significantly delay the relief provided in the CARES Act intended to provide an immediate benefit to taxpayers.

Special Rule for Filing Amended Partnership Returns

Revenue Procedure 2020-23 allows BBA partnerships the option to file an amended return instead of an AAR. However, the revenue procedure does not prevent a partnership from instead filing an AAR to obtain the benefits of the CARES Act or any other tax benefits to which the partnership is entitled. A BBA partnership that files an amended return pursuant to this revenue procedure is still otherwise subject to the centralized partnership audit procedures enacted by the BBA.

BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for the taxable years beginning in 2018 or 2019 prior to the issuance of Revenue Procedure 2020-23 may file amended partnership returns and furnish corresponding Schedules K-1 before September 30, 2020. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.

Insights

One of the principal tax benefits under the CARES Act for which partnerships may now file amended returns is the correction of the so-called “retail glitch” that prevented investments in qualified improvement property (QIP) from qualifying for bonus depreciation. This drafting error in the Tax Cuts and Jobs Act significantly increased the after-tax cost of making QIP investments. Partnerships who amend 2018 and 2019 tax returns to report bonus deprecation on QIP will issue amended Schedules K-1 to their partners who can file their own amended tax returns to potentially obtain refunds of taxes previously paid.
Notwithstanding the ability to claim bonus depreciation via filing amended returns, partnerships may want to consider filing Form 3115 instead. By filing a Form 3115, the partnership will report a favorable adjustment reducing current year taxable income. The benefit of this adjustment will be allocated to the existing partners which may not be the same partner group as existed during the 2018 and 2019 taxable years.
The Tax Cuts and Jobs Act added limitations on excess business losses for noncorporate taxpayers (IRC section 461(l)) for tax years beginning after December 31, 2017, and before January 1, 2026, limiting the ability above a threshold amount to offset business losses against non-business income. The CARES Act suspended these excess loss rules for tax years 2018 through 2020. If noncorporate partners (e.g., individuals) are allocated additional bonus depreciation expenses and they amend their 2018 or 2019 income tax returns, assuming that other loss limitation rules do not apply (e.g., basis, at-risk or passive activity limitations), they are not subject to the excess loss rules and may generally take a deduction against non-business income without limitation.
The CARES Act permits taxpayers to carry back net operating losses that arise in tax years 2018, 2019 and 2020 to their five preceding taxable years. If a bonus depreciation deduction allocated to a partner results in generating a net operating loss for that partner, the partner can potentially obtain a refund of taxes paid by carrying back the net operating loss to its five preceding taxable years.
The relief provisions under Revenue Procedure 2020-23 is not limited to provisions relating to the CARES Act. Partnerships can take advantage of these rules to amend their 2018 and 2019 tax returns for other matters. For example, an amended return could be filed to correct prior income or loss allocations which could create net operating losses eligible for the carryback provisions.
The CARES Act generally increases the business interest expense limitation percentage under Section 163(j) from 30% to 50% of adjusted taxable income. However, the CARES Act also creates a special rule for the business interest expense limitation under section 163(j) as it applies to partnerships. Specifically, there is an increase in the adjusted taxable income considered in determining the limitation from 30% to 50%. However, this increased adjusted taxable income percentage does not apply to a partnership’s 2019 tax year. Instead, 50% of the excess business interest expense from 2019 may be carried forward to 2020 and deducted exclusive of the Section 163(j) limitation. This rule is not impacted by Revenue Procedure 2020-23.
Eligible partnerships may have previously made an election to be treated as an electing real property trade or business in order to be exempt from the business interest expense limitation under Section 163(j). The cost for making such an election is that the partnership must use the alternative depreciation system for any nonresidential real property, residential rental property, and qualified improvement property used in its trade or business (i.e. no bonus depreciation permitted for qualified improvement property). Now that the CARES Act has corrected the retail glitch and bonus depreciation may be taken on qualified improvement property, partnerships are undoubtedly thinking about whether they can revoke their election to be an electing real property trade or business. Unfortunately, Revenue Procedure 2020-23 does not provide relief for partnership wanting to revoke their prior election. We await further guidance from the IRS on this issue.
REITs and other entities that either chose to use ADS life or are required to use ADS life for QIP may still benefit from the technical correction of the “retail glitch” as the CARES Act, in addition to correcting QIP to be 15-year property, also changes the ADS life to a 20-year life. REITs may prefer to file a Form 3115 to report a favorable adjustment in the current year in order to reduce their distribution requirements and retain more cash in 2020.

Other Considerations

The relief under Revenue Procedure 2020-23 is available only to BBA partnerships that filed Forms 1065 and furnished Schedules K-1 for the partnership taxable years beginning in 2018 or 2019 prior to the issuance of this revenue procedure. The amended return replaces any prior return (including any AAR filed by the partnership) for the taxable year for purposes of determining the partnership’s treatment of partnership-related items.

Filing Requirements

To take advantage of the option to file an amended return, a BBA partnership must file a Form 1065 (with the “Amended Return” box checked) and furnish corresponding amended Schedules K-1. The BBA partnership must clearly indicate the application of this revenue procedure on the amended return and write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return and attach a statement to each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail, but the IRS notes that filing electronically may allow for faster processing of the amended return. It is important to note that the revenue procedure explicitly provides that the amended partnership returns are to be filed via Form 1065. Consequently, Form 1065-X should not be used for purposes of filing an amended partnership return pursuant to this revenue procedure.

There are special rules for BBA partnerships whose returns are under examination or who have previously filed an AAR. In addition, the revenue procedure provides clarifying guidance about a partnership’s obligation to provide information under the proposed regulations for Global Intangible Low-Taxed Income, or GILTI.