Tag: tax law

A Summary of Inflation Reduction Act’s Main Energy Tax Proposals

On August 7, the Senate passed the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a significant number of climate and energy tax proposals, many of which were previously proposed in substantially similar form by the House of Representatives in November 2021 (in the “Build Back Better Act”).

Extension and expansion of production tax credit

Section 45 of the Internal Revenue Code provides a tax credit for renewable electricity production. To be eligible for the credit, a taxpayer must (i) produce electricity from renewable energy resources at certain facilities during a ten-year period beginning on the date the facility was placed in service and (ii) sell that renewable electricity to an unrelated person.[1] Under current law, the credit is not available for renewable electricity produced at facilities whose construction began after December 31, 2021.

The IRA would extend the credit for renewable electricity produced at facilities whose construction begins before January 1, 2025. The credit for electricity produced by solar power –which expired in 2016—would be reinstated, as extended by the IRA.

The IRA would also increase the credit from 1.5 to 3 cents per kilowatt hour of electricity produced.

A taxpayer would be entitled to increase its production tax credit by 500% if (i) its facility’s maximum net output is less than 1 megawatt, (ii) it meets the IRA’s prevailing wage and apprenticeship requirements,[2] and (iii) the construction of its facility begins within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, the IRA would add a 10% bonus credit for a taxpayer (i) that certifies that any steel, iron, or manufactured product that is a component of its facility was produced in the United States (the “domestic content bonus credit”) or (ii) whose facility is in an energy community (the “energy community bonus credit”).[3]

Extension, expansion, and reduction of investment tax credit

Section 48(a) provides an investment tax credit for the installation of renewable energy property. The amount of the credit is equal to a certain percentage (described below) of the property’s tax basis. Under current law, the credit is limited to property whose construction began before January 1, 2024.

The IRA would extend the credit to property whose construction begins before January 1, 2025. This period would be extended to January 1, 2035 for geothermal property projects. The IRA would also allow the investment tax credit for energy storage technology, qualified biogas property, and microgrid controllers.

The IRA would reduce the base credit from 30% to 6% for qualified fuel cell property; energy property whose construction begins before January 1, 2025; qualified small wind energy property; waste energy recovery property; energy storage technology; qualified biogas property; microgrid controllers; and qualified facilities that a taxpayer elects to treat as energy property. For all other types of energy property, the base credit would be reduced from 10% to 2%.

A taxpayer would be entitled to increase this base credit by 500% (for a total investment tax credit of 30%) if (i) its facility’s maximum net output is less than 1 megawatt of electrical or thermal energy, (ii) it meets the prevailing wage and apprenticeship requirements, and (iii) its facility begins construction within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, a taxpayer would be entitled to a 10% domestic content bonus credit and 10% energy community bonus credit (subject to the same requirements as for bonus credits under section 45). The IRA would also add a (i) 10% bonus credit for projects undertaken in a facility with a maximum net output of 5 megawatts and is located in low-income communities or on Indian land, and (ii) 20% bonus credit if the facility is part of a qualified low-income building project or qualified low-income benefit project.

Section 45Q (Carbon Oxide Sequestration Credit)

Section 45Q provides a tax credit for each metric ton of qualified carbon oxide (“QCO”) captured using carbon capture equipment and either disposed of in secure geological storage or used as a tertiary injection in certain oil or natural gas recovery projects.  While eligibility for the section 45Q credit under current law requires that projects begin construction before January 1, 2026, the IRA would extend credit eligibility to those carbon sequestration projects that commence construction before January 1, 2033.

The IRA would increase the amount of tax credits for projects that meet certain wage and apprenticeship requirements. Specifically, the IRA would increase the amount of section 45Q credits for industrial facilities and power plants to $85/metric ton for QCO stored in geologic formations, $60/metric ton for the use of captured carbon emissions, and $60/metric ton for QCO stored in oil and gas fields.  With respect to direct air capture projects, the IRA would increase the credit to $180/metric ton for projects that store captured QCO in secure geologic formations, $130/metric ton for carbon utilization, and $130/metric ton for QCO stored in oil and gas fields.  The proposed changes in the amount of the credit would apply to facilities or equipment placed in service after December 31, 2022.

The IRA also would decrease the minimum annual QCO capture requirements for credit eligibility to 1,000 metric tons (from 100,000 metric tons) for direct air capture facilities, 18,750 metric tons (from 500,000 metric tons) of QCO for an electricity generating facility that has a minimum design capture capacity of 75% of “baseline carbon oxide” and 12,500 metric tons (from 100,000 metric tons) for all other facilities.  These changes to the minimum capture requirements would apply to facilities or equipment that begin construction after the date of enactment.

Introduction of zero-emission nuclear power production credit

The IRA would introduce, as new section 45U, a credit for zero-emission nuclear power production.

The credit for a taxable year would be the amount by which 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year exceeds the “reduction amount” for that taxable year.[4]

In addition, a taxpayer would be entitled to increase this base credit by 500% if it meets the prevailing wage requirements.

New section 45U would not apply to taxable years beginning after December 31, 2032.

Biodiesel, Alternative Fuels, and Aviation Fuel Credit

The IRA would extend the existing tax credit for biodiesel and renewable diesel at $1.00/gallon and the existing tax credit for alternative fuels at $.50/gallon through the end of 2024.  Additionally, the IRA would create a new tax credit for sustainable aviation fuel of between $1.25/gallon and $1.75/gallon.  Eligibility for the aviation fuel credit would depend on whether the aviation fuel reduces lifecycle greenhouse gas emissions by at least 50%, which corresponds to a $1.25/gallon credit (with an additional $0.01/gallon for each percentage point above the 50% reduction, resulting in a maximum possible credit of $1.75/gallon). This credit would apply to sales or uses of qualified aviation fuel before the end of 2024.

Introduction of clean hydrogen credit

The IRA would introduce, as new section 45V, a clean hydrogen production tax credit. To be eligible, a taxpayer must produce the clean hydrogen after December 31, 2022 in facilities whose construction begins before January 1, 2033.

The credit for the taxable year would be equal to the kilograms of qualified clean hydrogen produced by the taxpayer during the taxable year at a qualified clean hydrogen production facility during the ten-year period beginning on the date the facility was originally placed in service, multiplied by the “applicable amount” with respect to such hydrogen.[5]

The “applicable amount” is equal to the “applicable percentage” of $0.60. The “applicable percentage” is equal to:

  • 20% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 2.5 and 4 kilograms of CO₂e per kilogram of hydrogen;

  • 25% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 1.5 and 2.5 kilograms of CO₂e per kilogram of hydrogen;

  • 4% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 0.45 and 1.5 kilograms of CO₂e per kilogram of hydrogen; and

  • 100% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate of less than 0.45 kilograms of CO₂e per kilogram of hydrogen.

A taxpayer would be entitled to increase this base credit by 500% if (i) it meets the prevailing wage and apprenticeship requirements or (ii) it meets the prevailing wage requirements, and its facility begins construction within fifty-nine days after the Secretary publishes guidance on the prevailing wage and apprenticeship requirements.

FOOTNOTES

[1] All references to section are to the Internal Revenue Code.

[2] The IRA would require new prevailing wage and apprenticeship requirements to be satisfied in order for a taxpayer to be eligible for increased credits. To satisfy the prevailing wage requirements, a taxpayer would be required to ensure that any laborers and mechanics employed by contractors or subcontractors to construct, alter or repair the taxpayer’s facility are paid at least prevailing local wages with respect to those activities. To satisfy the apprenticeship requirements, “qualified apprentices” would be required to construct a certain percentage of the taxpayer’s facilities (10% for facilities whose construction begins before January 1, 2023 and 15% for facilities whose construction begins on January 1, 2024 or after). A “qualified apprentice” is a person employed by a contractor or subcontractor to work on a taxpayer’s facilities and is participating in a registered apprenticeship program.

[3] An “energy community” is a brownfield site; an area which has (or had at any time after December 31, 1999) significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and a census tract in which a coal mine closed or was retired after December 31, 1999 (or an adjoining census tract).

[4] A “qualified nuclear power facility” is any nuclear facility that is owned by the taxpayer, that uses nuclear energy to produce electricity, that is not an “advanced nuclear power facility” as described in section 45J(d)(1),  and is placed in service before the date that new section 45U is enacted.

“Reduction amount” is, for any taxable year, the amount equal to (x) the lesser of (i) the product of 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year and (ii) the amount equal to 80% of the excess of the gross receipts from any electricity produced by the facility (excluding an advanced nuclear power facility) and sold to an unrelated person during the taxable year; (y) over the amount equal to the product of 2.5 cents multiplied by the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year.

[5] “Qualified clean hydrogen” is hydrogen that is produced (i) through a process that results in a lifecycle greenhouse gas emissions rate of no more than 4 kilograms of CO₂e per kilogram of hydrogen, (ii) in the United States, (iii) in the ordinary course of the taxpayer’s trade or business, (iv) for sale or use, and (v) whose production and sale or use is verified by an unrelated party. The IRA does not explain what “verified by an unrelated party” means.

Article By David S Miller, Amanda H Nussbaum, Martin T Hamilton, J. Tyler Moser, and Rita N. Halabi of Proskauer Rose LLP

For more tax law legal news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.

IRS Announces New Director of Whistleblower Office

On May 12, the U.S. Internal Revenue Service (IRS) announced that John W. Hinman will serve as the Director of the IRS Whistleblower Office. Hinman will oversee the agency’s highly successful whistleblower award program. Since 2007, the IRS has awarded whistleblowers over $1 billion based on the collection of over $6 billion in back taxes, interest, penalties, and criminal fines and sanctions.

“We hope that as the director Mr. Hinman will have an open door policy for whistleblowers and their advocates,” said leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. “We look forward to working with the new director to ensure that the incredibly important tax whistleblower program properly deters fraudsters and incentivizes whistleblowers to step forward. We hope that processes are put into place that speed-up the final determinations in reward cases,” added Kohn, who also serves as the Board of Directors of the National Whistleblower Center.

The IRS Whistleblower Program has been an immense success since it was established in 2006. For example, the program incentivized the whistleblowing of Bradley Birkenfeld, the UBS banker turned whistleblower whose disclosures helped lead to the dismantling of the Swiss banking system as it existed. However, the program has recently been plagued by a number of issues, including massive delays in the issuance of whistleblower awards. According to the IRS Whistleblower Office’s most recent annual report to Congress, the IRS currently takes 10.79 years to process a whistleblower case, leading to a backlog of over 23,000 cases.

Prior to his new appointment, Hinman served as Director of Field Operations for Transfer Pricing Practice in the IRS’s LB&I Division. According to the IRS, in this position, he “oversaw field operations of the Transfer Pricing Practice economists, revenue agents, and tax law specialists who focus on complex transfer pricing issues of multinational business enterprises.” Hinman will take over as Director of the IRS Whistleblower Office from Lee D. Martin, who left the agency on April 9 to serve as the Director of the Directorate of Whistleblower Protection Programs at the Occupational Safety and Health Administration (OSHA).

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.
For more articles about whistleblowers, visit the NLR White Collar Crime & Consumer Rights section.

The Biden Administration Proposes Mark-to-Market Minimum Tax on Individuals With More than $100 Million in Assets

Summary and Background.  On March 28, 2022, the Biden Administration proposed a 20% minimum tax on individuals who have more than $100 million in assets.  The minimum tax would be based on all economic income (which the proposal refers to as “total income”), including unrealized gain.  The tax would be effective for taxable years beginning after December 31, 2022.  The minimum tax would be fully phased in for taxpayers with assets of $200 million or more.

Under the proposal, an individual’s 2023 minimum tax liability would be payable in nine equal annual installments (e.g., in 2024-2032).  For 2024 and thereafter, the minimum tax liability would be payable in five annual installments.  The tax may be avoided by giving away assets to section 501(c)(3) organizations (including private foundations or donor-advised funds) or 501(c)(4) organizations before the effective date of the legislation so as to avoid the $100 million threshold.

The Biden proposal is an attempt to appeal to Senator Joe Manchin (D-W.Va.) and address some criticisms of Senator Ron Wyden’s (D-Or.) mark-to-market proposal.  Senator Manchin has expressed support for a minimum 15% tax on individuals, and this support was apparently an impetus for the proposal.  Senator Manchin has not, however, expressed support for a mark-to-market minimum tax, and the Biden Administration does not appear to have received any support from Senator Manchin before releasing its proposal.

The five-year payment period is an attempt to address concerns that Wyden’s proposal might overtax volatile assets, and to “smooth” taxpayers’ cash flows without the need for the IRS to issue refunds.  Under the Biden Administration’s proposal, installment payments of the minimum tax may be reduced to the extent of unrealized losses.

The minimum tax is being described as a “prepayment” that may be credited against subsequent taxes on realized income.  This description provides a backup argument on constitutionality: the minimum tax isn’t a tax on unrealized income but is merely a prepayment of tax on realized income.

Operation of the Minimum Tax.  The minimum tax would apply to taxpayers with wealth (assets less liabilities) in excess of $100 million.  The proposal does not define liabilities, and does not indicate whether a taxpayer would be deemed to own the assets of his or her children, or trusts.  Therefore it is unclear as to whether a taxpayer who is close to the $100 million threshold may avoid the tax by giving away assets to children.  As mentioned above, a taxpayer can give assets to section 501(c)(3) or 501(c)(4) organizations to avoid the threshold, and so, if the minimum tax is enacted, donations to charity would be expected to dramatically increase.

The proposal phases in for taxpayers with wealth between $100 million and $200 million.  The phase in is achieved mechanically by reducing the tax liability to the extent that the sum of (w) the minimum tax liability, and (x) the uncredited prepayments exceeds two times (y) the minimum tax rate, times (z) the amount by which the taxpayer’s wealth exceeds $100 million.  Thus, for a taxpayer with $150 million of wealth and a zero basis and no prior prepayments, the $30 million of minimum tax liability would be reduced by $10 million to equal $20 million.  ($10 million is amount by which (x) $30 million exceeds (y) $20 million, which is 40% [two times the minimum tax rate] times $50 million [the amount by which the taxpayer’s wealth exceeds $100 million].)

A taxpayer subject to the minimum tax would make two calculations:  Their “normal” tax liability under our current realization system, and the “minimum” tax under the proposal. Tax would be paid on the greater of the two.

For purposes of the 20% minimum tax, the taxpayer would include all unrealized gain on “tradeable assets.”  The proposal does not define tradeable assets.  Tradeable assets would be valued using end-of-year market prices.  The taxpayer would also include all unrealized gain on “non-tradeable assets.”  Non-tradeable assets would be valued using the greater of (i) the original or adjusted cost basis, (ii) the last valuation event from investment (i.e., a round of equity financing), (iii) borrowing (i.e., a lender’s appraisal), (iv) financial statements, or (v) other methods approved by the IRS.  Original or adjusted cost basis would be deemed to increase at a rate equal to the five-year Treasury rate plus two percentage points.  The five-year Treasury rate is currently 2.76% and so, at today’s rates, non-traded assets without a valuation event would deemed to increase in value at a 4.76% annual rate.  The proposal would not require valuations of non-tradeable assets.

While a taxpayer would be subject to the minimum tax if it exceeds the normal tax, as mentioned above, payment of the minimum tax would be made in equal annual installments (nine for the first year of minimum tax liability and five thereafter).

So, assume that a taxpayer purchases an equity interest in a non-traded C corporation on January 1, 2023 for $200 million.  The taxpayer has no realized income and no other assets.  The taxpayer would have zero “normal” tax.  Assume that the five-year Treasury rate is 2.76%.  The investment would be deemed to increase in value by 4.76% (to $209.5 million).  The minimum tax would be 20% of $9.5 million, or $1.9 million.  If this was the taxpayer’s first year subject to the minimum tax, the minimum tax liability would be $211,111 in each of years 2024-32, subject to the “illiquid exception” described below.  If the taxpayer subsequently sells the C corporation, it would credit the minimum tax prepayments against his or her income tax liability.

Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized gains.

The Biden Administration has separately proposed that death would give rise to a realization event.  If a taxpayer’s prepayments in excess of tax liability exceed gains at death, the taxpayer would be entitled to a refund.  The refund would be included in a single decedent’s gross estate for estate tax purposes.  Net uncredited used prepayments of a married decedent would be transferred to the surviving spouse (or as otherwise provided in regulations).

In contrast to Senator Wyden’s proposal, which does not require that tax be paid on unrealized gain for non-traded assets, and instead imposes a deferral charge upon realization, the Biden Administration’s proposal generally requires that minimum tax be calculated with respect to all unrealized gain, including deemed appreciation on non-traded assets, subject to an “illiquid exception.”  If tradeable assets held directly or indirectly make up less than 20% of a taxpayer’s wealth, the taxpayer may elect to include only unrealized gain in tradeable assets in the calculation of their minimum tax liability.  A taxpayer that makes this election would be subject to a deferral charge upon realization to the extent of gain, but the deferral charge would not exceed 10% of unrealized gain.  The proposal does not indicate the rate of the deferral charge.

This aspect of the Biden Administration’s proposal provides a meaningful benefit to “illiquid” taxpayers and encourages taxpayers to become “illiquid” to qualify for the exception.  The proposal provides that tradeable assets held “indirectly” are treated as owned by the taxpayer for this purpose and therefore it is unclear whether and to what extent taxpayers can contribute tradeable assets into nontradeable vehicles to qualify for the illiquid exception.  The proposal would provide the IRS with specific authority to issue rules to prevent taxpayers from inappropriately converting tradeable assets to non-tradeable assets.

Estimated tax payments would not be required for minimum tax liability, and the minimum tax payments would be excluded from the prior year’s tax liability for purposes of computing estimated tax required to avoid the penalty for underpayment of estimated taxes.

The tax is expected to affect 20,000 taxpayers (in contrast to roughly 700 under Wyden’s plan) but to generate approximately the same amount of revenue as Wyden’s proposal: $360 billion over ten years as estimated by the Treasury Department (which is expected to be around $550 billion over 10 years under the Joint Committee on Taxation’s “scoring” methodology).

Article By Robert Gaut, Martin T Hamilton, and Colleen Hart at Proskauer Rose LLP

For more tax law legal news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.

COVID-19 Telecommuting Tax and Leave Issues for Employers

Months into the COVID-19 pandemic, many employer telecommuting arrangements remain in place, with several large corporations opting to extend these arrangements well into 2021.  The benefits of such arrangements have been clear for many employers during the pandemic, including that they permit continued productivity while keeping employees safe.  However, the longer that employees remain out of the office, the more telecommuting-related issues arise, including with respect to taxation of employee income and leave requirements, which we discuss below.

Tax Implications of an Employee Working Remotely Due to the COVID-19 Pandemic

As a general rule, employees pay income tax in the state in which they perform services for an employer.  For example, if a teleworking employee lives and works entirely in New Jersey despite the fact that her employer is located in Florida, the worker’s income tax would be withheld according to New Jersey law and paid to the State of New Jersey.  Many states have reciprocal agreements with one another on the treatment of taxes when an employee works in one state and lives in another.  Two neighboring states will agree that an employee who works in State A can pay income tax in their home State B, allowing the employee to file one tax return each year.  In the absence of tax reciprocity agreements between neighboring states, employees may be subject to income taxes in two states (for example, New York and New Jersey).  With masses of employees teleworking in a different state from their typical work arrangement, where the employee should pay income taxes becomes increasingly complicated.

Some states have addressed this issue and other business-related tax implications caused by COVID-19.  For example, the Massachusetts Department of Revenue issued emergency regulations concerning telecommuting employees, outlined in a Technical Information Release (“TIR”).  The TIR became effective on March 10, 2020 and remains in effect until Governor Baker gives notice that the state of emergency is over.  The TIR clarifies (1) the treatment of personal income taxes for employees currently working outside the state (i.e., telecommuting) due to COVID-19; (2) sales and use tax nexus for vendors with a “physical presence” in Massachusetts solely due to COVID-19; (3) whether a business is subject to a corporate excise tax with employees currently “conducting business” on its behalf in Massachusetts; and (4) whether to tax employees currently working inside or outside Massachusetts for Paid Family and Medical Leave purposes (more on this piece below).

New Jersey similarly issued FAQ’s addressing telecommuting tax implications.  The state’s Division of Taxation waived the “nexus-creating” impact on out-of-state businesses with employees currently working in New Jersey as a result of COVID-19.  The Washington D.C. Office of Tax and Revenue published similar information stating that it will not impose a corporate franchise tax nexus on employers because employees are telecommuting during the public emergency caused by COVID-19.

In the absence of guidance from each state on remote work tax implications, employers are encouraged to consult legal counsel or their accountants on how out-of-state remote workers impact company tax obligations.

Leave Law Implications of Employee Remote Working

It was hard enough before the pandemic started to untangle the complex web of leave entitlements that may apply to an employer’s workforce in different states.  This web of leave laws becomes even more complicated however, when employees telecommuting in a different state from which they typically work begin to impact the employee’s eligibility for local leave.

For example, how does an employee who regularly works in New York City but is now working remotely from New Jersey accrue sick leave?  Is the employee entitled to New York City Sick and Safe Time and/or New Jersey Sick Leave?  Ultimately (and absent additional guidance) the answer will depend on the eligibility requirements of the leave, and the specifics of the employee’s work history.

In this scenario, New Jersey’s FAQs on sick time provides that “a telecommuter who routinely performs some work in New Jersey is entitled to full earned sick leave covered under [New Jersey’s] Earned Sick Leave Law so long as the employee’s base of operations or the place from which such work is directed and controlled is in New Jersey.”  Based on this guidance, would an employee who typically works in New York City, but who is currently telecommuting in New Jersey as a result of the pandemic be entitled to sick leave under New Jersey law?  As the pandemic, and in turn this telecommuting arrangement, continues, at what point does the employee’s base of operations shift to New Jersey requiring the employer to provide sick leave?

At the same time, would this employee still be entitled to accrue sick leave under New York City’s law (and New York State’s new law, discussed in our previous post)?  New York City’s law, which was recently amended, has interpretive guidance (applicable under the old law) stating that an employee only accrues sick leave under the New York City law when they perform services in New York City.  If they are subject to a temporary telecommuting arrangement, do they lose eligibility to accrue New York City sick leave?  Will New York City update its guidance to address this issue?  Will New York State issue guidance under its new law to address this issue as well? Employers should also be mindful that employees may be able to maintain multiple accruals depending on where they perform services.

In Massachusetts, the state has thankfully clarified how to treat employee eligibility for the Massachusetts Paid Family and Medical Leave Act.  Employers and employees began contributing to the Commonwealth’s trust for paid family and medical leave benefits back in 2019, and most leave entitlements will become available in a few short months on January 1, 2021 (see our blog posts on preparing for Massachusetts Paid Family and Medical Leave here and here).  However, many employees regularly working in Massachusetts commute in from neighboring states including Rhode Island and New Hampshire.  With such employees now living and teleworking outside of Massachusetts, should employers still deduct contributions from employee paychecks?  Fortunately, the Massachusetts DOR addressed this issue in its Technical Information Release described above:  An employee who previously performed services outside of Massachusetts and was not subject to PFML will not become subject to PFML solely because the employee is temporarily working from home in Massachusetts.  Likewise, an employee who previously performed services in Massachusetts but is temporarily working from home outside of Massachusetts solely due to COVID-19 continues to be subject to the PFML rules.  However, if employers decide to extend teleworking arrangements beyond the pandemic, this guidance will no longer apply.  Employers will need to determine if and when an employee becomes subject to (or is no longer subject to) Massachusetts Paid Family and Medical Leave.

Employers may be able to conduct a quick analysis to determine whether an employee is or is not entitled to a certain leave benefit while COVID-19 state of emergencies remain in place in many states.  However, if long-term telecommuting arrangements become the norm after the pandemic ends, employers must reevaluate applicable leave policies to ensure they align with their new remote workforce.

Parting Shot

As the last several months of telecommuting has taught us, working from home can have both benefits and drawbacks.  Employers are encouraged to consult with counsel before making tax and leave-related decisions that impact employees, as they relate to remote working during the COVID-19 pandemic.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
For more articles on tax and labor topics, visit the National Law Review Labor & Employment section. 

IRS Issues Guidance on Deferral of Certain Employee Payroll Taxes

On Friday, August 28, the IRS issued Notice 2020-65, providing guidance about the deferral of certain employee payroll taxes under the President’s Executive Memorandum issued earlier in August. As has become the norm in these uncertain times, the guidance must be considered fluid and subject to change without notice. The existing guidance leaves many questions unanswered so we will continue to monitor this issue.

What Is the Employee’s Portion of the Payroll Taxes Subject to Deferral Under Executive Memorandum and Notice 2020-65?

In addition to income tax withholding, payroll taxes include Federal Insurance Contributions Act (FICA) taxes. FICA taxes include old-age, survivor and disability insurance (OASDI) (Social Security) and hospital insurance (Medicare). These payroll taxes apply at a rate of 15.3 percent for wages up to $137,700 for the 2020 calendar year. The obligation for the FICA taxes are equally divided between employers and employees at 7.65 percent, broken down as follows: 6.2 percent for Social Security and 1.45 percent for Medicare. Accordingly, for purposes of the Executive Memorandum and Notice 2020-65 the amount subject to deferral is 6.2 percent of the Social Security taxes as the employee’s share.

What Is Known

  • Deferral of the employee’s share of Social Security taxes appears to be voluntary by the employer based on the language in this notice, Code Section 7508A, and prior statements made by Secretary Mnuchin. Since the deferral is voluntary, the employer may forgo the deferral and timely withhold and pay over the required taxes.
  • The employer is the “Affected Taxpayer” under Notice 2020-65. Thus, an employee cannot require its employer to defer the taxes.
  • The option to defer applies to wages paid to an employee on a pay date during the period beginning September 1, 2020 and ending on December 31, 2020.
  • The option to defer only applies to employees earning less than $4,000 paid for a bi-weekly pay period.
  • The determination of whether the employee earns less than $4,000 per bi-weekly pay period is made on a pay period-by-pay period basis. Notice 2020-65
  • The employer must withhold and pay the deferred taxes under this notice ratably between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to the tax will begin to accrue on May 1, 2021, with respect to any unpaid applicable taxes. Notice 2020-65
  • “If necessary, the Affected Taxpayer [Employer] may make arrangement to otherwise collect the total Applicable Taxes from the employee.” Notice 2020-65. Implies the penalties will be assessed against Employer as the Affected Taxpayer as defined by the guidance.

What Is Not Known

  • What if the employee leaves the company?
  • What if employee doesn’t make enough money to pay the tax back?
  • It appears that the obligation to pay the deferred taxes remains with the employer in either situation above.

Absent further guidance or congressional action, the deferred taxes must be withheld from the employee’s wages and paid over to the government between January 1, 2021 and April 30, 2021. Employers who are considering allowing employees to defer payment of taxes should consult counsel and develop a plan to implement before ceasing to make deductions. Considerations for the plan should include an employee communication plan developed to address employee payment obligations after the deferral period expires or if the employee becomes no longer employed by the employer. In addition, the plan should take into account whether employees are covered by a collective bargaining agreement that triggers notice and bargaining obligations. Also, keep in mind that Michigan employers must have signed authorization from the employee to make deductions from wages. Employers should consider obtaining written authorization from qualifying employees who elect to defer that includes the plan to repay the deferred taxes and a backup in case the employee ceases to be employed before the taxes are paid.

© 2020 Varnum LLP
For more articles on the IRS, visit the National Law Review Tax, Internal Revenue Service and Treasury Legal News section.

Register for the 51st Annual PLI Estate Planning Institute

Live Webcast: Sept 14 – 15, 2020, 9 a.m. EDT

Click here to register.

The Tax Cuts and Jobs Act of 2017 (the “2017 Act”), which was enacted on December 22, 2017, included significant changes to the federal transfer tax regime and related income tax provisions.  More recently, the financial and societal impact of the COVID-19 pandemic of 2020 continues to reverberate and create uncertainty in the future.

This program will review the transfer tax and related income tax developments with the 2017 Act as a starting point, and will discuss how such developments impact estate, trust and income tax planning, and the administration of decedents’ estates.  Moreover, the program will review other recent developments regarding estate, trust and transfer tax and income tax planning.  Further, the COVID-19 crisis and the related estate, trust and income tax legislation and rulings promulgated in response to such crisis will be discussed.

What You Will Learn

  • Advising clients in a time of unprecedented uncertainty
  • An update on recent developments in all areas of estate, trust and transfer tax planning including legislation and rulings issued as a result of the COVID-19 crisis
  • A review of the interaction between the federal transfer tax regime and state transfer tax regimes
  • A review of the transfer tax and related income tax provisions of the 2017 Act
  • Income tax planning for estates and trusts
  • Administering estates and trusts during and after the COVID-19 pandemic
  • A review of the SECURE Act of 2019
  • A review of international estate planning and tax changes
  • FATCA and its progeny
  • A discussion of trust planning and divorce
  • Ethical considerations for attorneys
  • Elder law and special needs planning considerations
  • A review of tax issues for art collectors
  • An update on charitable donation planning
  • A review of electronic Wills and modern-day estate planning
  • Asset protection planning in a pandemic world

…and much more!

Special Features

  • Full hour of ethics credit

Who Should Attend

Attorneys and other professionals advising on estate planning and/or transfer tax planning, including accountants, financial planners and anyone else whose practice requires a solid understanding of estate planning.

Program Level: Overview

Prerequisites: Attendees should have a basic understanding of trusts and estates terminology and a foundational background in tax

Intended Audience: Attorneys, accountants, financial planners, and other professionals who specialize in estate planning, life insurance products and/or transfer tax planning

Advanced Preparation: None

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