The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) generally provides (i) employers with a deferral mechanism for the employer portion of any Social Security taxes and (ii) self-employed individuals with a deferral mechanism for the employer portion of any self-employment taxes attributable to Social Security. Under the CARES Act, 50% of any taxes eligible for deferral are due on December 31, 2021, and the remaining 50% of such taxes are due on December 31, 2022 (each such due date, the “Applicable Due Date”).
While the CARES Act was helpful with immediate guidance, a number of questions remained outstanding. In particular, questions remained with regard to the interaction of the deferral provisions and the Small Business Administration paycheck protection program (the “Paycheck Protection Program”).
In response to some of the outstanding questions, the IRS issued answers to several FAQs with respect to the deferral provisions under the CARES Act. The following are summaries of the responses to the tax deferral FAQs provided by the IRS:
A cash or accrual taxpayer can generally deduct the employer portion of any Social Security taxes or the employer portion of any self-employment taxes attributable to Social Security in the taxable year in which such taxes are paid to the United States Department of the Treasury. To the extent a taxpayer elects to defer the employer portion of any Social Security taxes or the employer portion of any self-employment taxes attributable to Social Security, the taxpayer will generally not be entitled to a deduction with respect to such taxes in 2020. Instead, when a taxpayer pays the deferred employer portion of any Social Security taxes or the deferred employer portion of any self-employment taxes attributable to Social Security in 2021 and 2022 to the United States Department of the Treasury, the taxpayer will generally be entitled to a deduction in such taxable year.
Taxpayers should take into account the relative benefits of deferral as compared to an immediate deduction that could reduce the taxpayer’s 2020 taxable income or create a 2020 NOL that is now eligible for carryback under the CARES Act.
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