Dear Clients and Friends,
I’d like to keep you informed about a few hot-topic tax developments that have occurred in the past week:
New Employee Payroll Tax Deferral Scheme
On August 8, 2020, President Trump signed an executive order deferring payroll tax obligations of employees. But what the heck does it really mean?
Like many other controversial issues in our nation’s capital, the outcome is far from clear, while the benefits are being debated along political lines.
Under the executive order, employees would not be required to pay their share of the 6.2% Social Security tax that normally applies to an annual wage base ($137,700 for 2020). The grace period would last from September 1 through the end of the year. The deferral is generally available to an employee earning $4,000 every two weeks, which works out to $104,000 for the year.
But keep in mind that this is only a deferral—not a complete waiver—although the Treasury Department has been instructed to look into forgiveness of the amounts. And employers may choose to continue to withhold the payroll taxes from paychecks. This is fast-developing and employers have many questions about the details; including whether the deferral is voluntary for employers and employees, how to implement the deferral, and how employees would pay back the deferred taxes. Yikes, very confusing! But what else would we expect from this year 2020?
Finally, the executive order likely will be challenged as exceeding the president’s authority on constitutional grounds. The bottom line is that many tax practitioners like me and employers are perplexed about what should or should not be done. Hopefully, we will have more clarity soon about the issues relating to the payroll tax deferral order, and its legality. Stay tuned.
PPP Loan Forgiveness
The Small Business Administration opened the forgiveness application portal for its PPP loans this week. But I think we need to think twice before rushing in to apply. Here’s why:
The SBA continues to issue more guidance in the form of FAQ’s. Plus, we’re still waiting for Congress to address a burning issue: Will expenses covered by these forgivable loans be deductible on tax returns?
So, I don’t think I would want to be the first to rush into the forgiveness process. Things will probably continue to change, so do you really want to be the guinea pig?
Forgiveness of the loan will be deemed tax-free. YAY! However, IRS says business owners who take the loan won’t be able to write off expenses that would otherwise be deductible if they use those PPP funds to cover the cost and then obtain forgiveness. Well, golly-gee this kills the joy. Since the matter is up in the air, applying for forgiveness now might be iffy. What if you apply for forgiveness now and the loan is forgiven, what’s the rule at the time?
So, as difficult as it may be to wait, the safest move for now might be to see how lawmakers proceed before taking a chance on applying for the forgiveness – particularly to give us more certainty on deductibility.
In the meantime, shore up your paperwork so that you’re ready to apply. The uncertainty makes for shaky tax planning for the rest of the year, but at least you’ll have your documents ready to go. You might not know your taxable profit until you know whether the IRS will allow us to deduct those expenses. The current guidance says no, but it’s hopeful that Congress will change this.
Please feel free to contact me with any questions,