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IRS Asked to Sweeten Employment Tax Deferral Pot

Posted on July 1, 2020

Companies deferring employment tax payments to a later year are potentially missing out on a deduction this year, but some practitioners are hoping to change that.

Practitioners are asking the IRS and Treasury to waive the economic performance requirement that generally bars a deduction for items until they’re actually paid, Anne G. Batter of Baker McKenzie LLP said June 30 on a webcast hosted by the Tax Executives Institute and Grant Thornton LLP. Treasury has the broad authority to do that under section 461(h), and given the economic climate and liquidity issues companies are dealing with, that seems like the right policy, she added.

“So far, we haven’t been laughed at, so that’s promising,” Batter said of the discussions with government officials on the topic.

The issue is being pressed as some companies take advantage of the employment tax deferral outlined in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which allows all employers to postpone those payments until 2021. And even though those payments will come later, companies still want the deduction in 2020 as they face financial uncertainty from the pandemic.

“I would also note that in the current context, making an exception to the economic performance rule seems like good policy,” Batter told Tax Notes after the webcast. “Companies really are facing liquidity issues and it does not seem that Congress, in allowing the deferral, meant to saddle them with a delayed deduction. It seems like that was just rushed and not thought through.”

The CARES Act provided employers with several options to get much-needed cash. They included the Paycheck Protection Program, which allows businesses to take loans that are forgiven tax free if a specified portion of the proceeds is spent on payroll costs.

Companies can forgo that loan and instead take advantage of the employee retention credit, which is fully refundable and applied against the employer’s portion of payroll taxes. Only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.

Employment tax deferral until the end of the year is also an option under the CARES Act. The IRS recently updated its guidance to reflect a law change that allows employers to defer employment taxes even after they received a Paycheck Protection Program loan that was later forgiven.

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