MARINA VISHNEPOLSKAYA, ESQ., P.C.

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Corporate Tax Proposals in House Ways and Means Committee Summary

Posted on September 13, 2021 at 5:05 PM

Introduction; Summary of Proposed Tax Reforms. On September 13, 2021, the Ways and Means Committee of the United States House of Representatives released a section-by-section summary (“Summary”) of revenue provisions accompanying a $3.5 trillion budget plan released by Senate Democrats on August 9, 2021.  The tax-increase provisions would be under Subtitle I of a forthcoming budget reconciliation bill that Congressional Democrats intend to approve without Republican support. The Summary provisions reflect in part earlier tax proposals in the American Jobs Act and the American Families Plan. Summary provisions include corporate and international tax reforms, tax increases for certain high-income individuals, modifications to retirement plan rules, and additional appropriations for IRS enforcement of taxpayer compliance.


Corporate Tax Rate Adjustments. Most notably, section 138101 of the Summary provides for an increase in the top income tax rate for corporate taxpayers from 21 percent to 26.5 percent. The current flat corporate income tax rate is replaced with a graduated rate structure akin to the tax rates applicable to individual taxpayers. Under the proposal, corporate taxpayers would pay income tax at a rate of 18 percent on the first $400,000 of taxable income. The rate would increase to 21 percent on corporate income up to $5 million. The top 26.5 percent corporate tax rate would apply to income above $10 million. Certain corporations or income would be excepted from the graduated corporate income tax regime.


Miscellaneous Provisions. Certain other Summary provisions include modifications to tax rules enacted as part of the 2017 Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (“TCJA”) and more recently, as part of federal Covid relief legislation. For instance, section 138501 of the Summary provides an earlier effective date of amendments to Code section (“Section”) 162(m) and further curbs to deductibility of executive compensation awards to certain highly compensated employees. The Section 162(m) amendments were included in the American Rescue Plan Act of 2021, passed in March, Pub. L. No. 117-2 (2021) (“ARPA”).


Conclusion; Action Items for Taxpayers. Current budget reconciliation proposals include wide-ranging tax reforms.  Broadly, taxpayers that have relied on extensive tax planning as a result of TCJA reforms should monitor closely forthcoming proposed legislation and seek counsel on tax planning that may be necessary to comply with further Code amendments. Significantly, entities treated as corporations for Code purposes, reorganizing or considering a check-the-box election closely should follow the text of Summary section 138101 provisions. Such taxpayers would find advisable to seek tax counsel on complexities in applying a newly graduated tax rate to their income.  Likewise, taxpayers would find advisable to review with tax counsel choice of entity under applicable State incorporation statutes and classification under the Code for conducting business.

 


FinCEN Compliance with Corporate Transparency Act of 2020

Posted on August 11, 2021 at 11:40 AM


Introduction. On January 1, 2021, the Corporate Transparency Act of 2020 (“CTA”) was enacted into law as part of H.R. 6395, the National Defense Authorization Act, 2021 (“NDAA”). The CTA added Section 5336 to the Bank Secrecy Act, 31 U.S.C. sections 5311 et seq., originally enacted in 1970 (“BSA”). On April 5, 2021, the United States Department of Treasury (“Treasury”) and Financial Crimes Enforcement Network (“FinCEN”) published proposed regulations under the CTA. The notice of proposed rulemaking contains 48 questions to be addressed in forthcoming beneficial ownership information reporting requirements to be promulgated within a year of the enactment.


Proposed Regulations. Under the legislative history, the purpose of the CTA was “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the U.S. government. The disclosure was intended to target “bad actors who own or control businesses that act as ‘fronts’ or shell companies on behalf of those conducting illicit activities.” The questions for comment, divided in five sections discussed below, purport to weigh the costs and benefits to stakeholders of implementing solutions to these legislative concerns.


The definitions section contains questions regarding the scope of reporting companies that would be subject to CTA requirements. The definitions section also seeks to clarify the scope of corporate filings practices under state or other applicable law, which would result in an entity being deemed a reporting company under the CTA. Ultimate beneficial owners ("UBOs") of reporting companies should be aware that any final rule defining such terms will determine whether a corporate structure falls within the purview of the CTA reporting requirements.


Treasury has inquired on information a reporting company should disclose to FinCEN about its corporate affiliates, parents and subsidiaries, particularly in light of complex, tiered corporate structures. In addition, Treasury is considering whether such affiliate information should be reported as a matter of course or only under certain conditions.  UBOs would find advisable to assess whether holding company structures may be streamlined to increase efficiency and reduce potential reporting burdens under final regulations.

The Proposed Regulations include several questions on technical aspects of a FinCEN identifier used by a filer to report beneficial ownership information. Treasury noted that complex ownership structures may include multiple entities that may require individual FinCEN identifiers. Treasury suggested it may consider allowing a common FinCEN identifier for tiered reporting companies to facilitate CTA compliance by financial institutions.

Treasury inquired whether additional cybersecurity measures should be implemented to protect the confidentiality of beneficial ownership and applicant information. In addition, Treasury is considering permitting use of beneficial ownership data or applicant information by financial institutions for other purposes. Thus, UBOs should be aware that beneficial ownership information reported to FinCEN may be disclosed to other governmental agencies in some cases or to financial institutions.

Treasury expressed concern with balancing the compliance objectives of CTA with undue burdens on small businesses that may be subject to FinCEN reporting rules. Treasury is considering alternative reporting rules for small business to assist in reducing costs of CTA compliance. Therefore, UBOs using LLCs in their holding company structures need to be aware of potential multiple reporting requirements.

Conclusion and Action Items.  Ultimate beneficial owners of LLCs or other entities formed under the laws of a U.S. jurisdiction must comply with forthcoming final Treasury regulations implementing the requirements under the CTA, enacted earlier this year. UBOs may find advisable to engage U.S. tax and corporate governance counsel to monitor developments in Treasury and FinCEN rules on scope of beneficial ownership, disclosure requirements, exceptions, confidentiality protections, and beneficial ownership reporting compliance at Federal, state, local or tribal government levels.

Update - Suspension of IRS Form 990 Schedule B Disclosure Rules by NYS AG following Americans for Prosperity v. Bonta

Posted on August 2, 2021 at 10:50 AM


On July 29, 2021, the Office of the New York State (NYS) Attorney General (AG), Charities Bureau announced suspension of the IRS Form 990 Schedule B disclosure requirement by tax-exempt organizations as part of Form CHAR500 filing required under NYS charitable solicitation laws, Exec. L. Article 7-A (or "Announcement").  The Announcement follows the July 1, 2021, Supreme Court decision (or "SCOTUS") in Americans for Prosperity v. Bonta, 594 U.S. __ (2021), in which the Supreme Court struck down a similar disclosure rule under California law.  Schedule B, filed as part of IRS Form 990, generally requires certain tax-exempt organizations, including charities exempt under section 501(c)(3) of the Internal Revenue Code of 1986, as amended ("Code") or Code section 501(c)(4) political organizations to provide the names and addresses, total contributions, and types of contributions of contributors who donate the greater of $5,000 or 2% of total contributions in a tax year ("substantial contributors").


The July 29, 2021 guidance is a pronouncement by NYS AG Office that it will no longer collect, rather than post online, any Schedules B, pending review of the SCOTUS decision and its impact on enforceability of the NYS Schedule B disclosure requirement. The notice also provides that NYS AG will not challenge any Form CHAR500 filed without substantial contributor data. Thus, any Form CHAR500 filed previously or from July 29, 2021 without a Schedule B or with a redacted Schedule B will still be deemed compliant, pending AG review of the SCOTUS ruling.


Importantly, the Announcement is silent on whether or not AG will continue to post Schedule B online, whether or not in redacted form, which already has been filed as part of a CHAR500 prior to 07/29. Therefore, tax-exempt organizations subject to the Schedule B disclosure rules under Exec. L. Article 7-A and accompanying NYS Department of State regulations do not have to submit any Schedules B presently as part of Form CHAR500, whether or not in redacted form.  Simultaneously, charities should continue to monitor NYS AG guidance regarding enforcement of the Schedule B requirement, and consult with counsel regarding any further changes to the Schedule B substantial contributor disclosure.

U.S.-Swiss Tax Treaty Benefits for Dividend Payments to IRAs Under the 2021 CAA

Posted on July 29, 2021 at 5:40 PM

Introduction. On June 7, 2021, the IRS published in Announcement 2021-11, 2021-23 I.R.B. 1196 the new Competent Authority Arrangement (“CAA”) of May 6, 2021, by and between the competent authorities of the United States and Switzerland (“Authorities”) regarding pension or other retirement benefits that may be eligible for tax relief under paragraph 3 of Article 10 (Dividends) of the U.S. – Switzerland bilateral tax treaty (“Treaty” or “Convention”). The CAA was entered into by the Authorities under paragraph 3 of Article 25 (Mutual Agreement Procedure or “MAP”) of the Treaty governing bilateral agreements on the Convention’s interpretation. The CAA supersedes a CAA entered into by the Authorities on December 10, 2004 (“2004 CAA”).


The Treaty previously was amended by the Protocol, signed on September 23, 2009 (“Protocol”), which deleted and replaced paragraph 3 of Article 10 (Dividends) of the Treaty (“Article 10(3)”). The Protocol expanded the scope of pension or retirement benefits eligible for Treaty relief under Article 10(3). The revised Article 10(3) added individual retirement accounts (“IRAs”) to the list of programs resident in a Contracting State, distributions of dividends to which by a company resident in the other Contracting State would be exempt from source-country taxation. The CAA is effective retroactively for dividends paid on or after January 1, 2020.


Article 10(3) Generally. There are two requirements for Article 10(3) to apply. First, the pension or retirement arrangement must satisfy the limitation on benefits clause in Article 22(2) of the Treaty. Article 22(2) states that an entity described in Article 4(1)(c), which includes a retirement plan, may be entitled to Treaty benefits if more than half of its beneficiaries, members or participants, as the case may be, are entitled to Treaty benefits. Article 4(1)(c)(i) refers generally to a qualified retirement plan which is a tax-exempt employees’ trust established in a Contracting State, and which is established or sponsored by a person resident in such Contracting State within the meaning of Article 4.


The second requirement under Article 10(3) is that the pension or retirement arrangement resident in the other Contracting State must not control the company resident in the first Contracting State and making the contributions to the foreign plan or arrangement. The benefits under Article 10(3) with respect to dividends paid by a treaty country resident corporation to a qualified plan or individual retirement arrangement in the other treaty country are distinguished from benefits under Article 18 of the Treaty with respect to distributions from qualified plans.

 


Dividend distributions under Treaty generally. Generally, Switzerland imposes a 15 percent withholding tax on profit distributions from Swiss corporations. For this purpose, profit distributions generally include dividends, liquidation proceeds, and hidden profit distributions. Under the Treaty, source-country taxation of dividends was limited to a percentage of the gross amount of the dividends if the beneficial owner of the dividends was a resident of the other treaty country. By contrast, the Treaty provided an exemption from source-country tax with respect to dividends beneficially owned by a qualified retirement program, so long as the pension plan or IRA did not control the dividend-paying company.


The Treaty defines “dividends” as income from shares or other rights, not constituting debt claims, that participate in profits. Dividends also include income subjected to the same tax treatment as income from shares under the law of the country in which income arises. Under the Protocol, participation in the profits of the obligor is a factor in determining whether an instrument characterized as a debt-claim should be treated as equity for purposes of the Treaty.


Article 10(3) Benefits for IRAs. Article 10(3) may provide Treaty relief in a scenario, in which an IRA invests assets in stock of a corporation domiciled in the Treaty country. For example, an individual may direct his IRA custodian to invest IRA assets in Swiss corporation stock. In that case, the Swiss corporation may distribute dividends to its stockholders, including the IRA. Generally, such dividend distribution would be subject to a withholding at source under Swiss tax law. However, under Article 10(3), the distribution of dividends would be entitled to the zero percent tax rate. Thus, the IRA as an investor in Swiss corporation stock would not be subject to Swiss withholding tax on the periodic dividend distribution by the Swiss corporation.


Conversely, under Article 10(3), Swiss individual retirement solutions, known commonly as Pillar 3a arrangements, would not be subject to withholding at source by the U.S. on dividend distributions from investments in U.S. corporation stock. Thus, for example, a Swiss retiree residing in the U.S. and investing in U.S. corporation stock through a Pillar 3a arrangement would not be subject to U.S. withholding tax on periodic dividend distributions from the U.S. company.

 


Action Items for IRAs Receiving Swiss Company Dividend Payments. Thus, treaty relief would apply only if the pension or retirement program, or individual retirement savings plan did not control the foreign company making pension or retirement contributions to the arrangement or plan. In recent years, IRA owners have been seeking higher rates of return and have been more open to using an IRA to invest in alternative assets, such as bitcoin. The growing trend of using an IRA to invest outside traditional asset classes may involve an increase in IRA investments in privately held foreign companies within a scope of Article 10(3). Therefore, IRA owners would find of benefit to consult with counsel regarding the definition of control, which would disqualify the Swiss company dividends distributed to an IRA from Article 10(3) benefits. 

Schedule B Contributor Disclosure by Charities After Americans for Prosperity Foundation v. Bonta

Posted on July 12, 2021 at 3:40 PM

Introduction.  After more than a decade of litigation, the California Attorney General's ("AG’s") IRS Form 990, Schedule B disclosure requirement was struck down by the United States Supreme Court in Americans for Prosperity Foundation v. Bonta, Case No. 19-251 (July 1, 2021) (“Bonta”). The Bonta decision affects U.S. jurisdictions that require charities to disclose Schedule B to the state AG pursuant to the charitable solicitation laws of that U.S. state. Beginning in 2018, through guidance, the IRS had limited the applicability of federal Schedule B reporting requirements under the Internal Revenue Code of 1986, as amended, to certain tax-exempt organizations.  Final IRS regulations on Schedule B disclosure were issued in May 2020.


Schedule B Overview.  In Bonta, petitioners were tax-exempt charities that solicited contributions in California, and therefore, were subject to California charitable solicitation laws, including the AG registration and annual renewal requirements. California AG regulations required registrants to file copies of their IRS Forms 990 or equivalents, along with any attachments and schedules. IRS Form 990 includes Schedule B, on which charities report annually the names, addresses, total contributions and types of contributions of contributors who donate the greater of $5,000 or 2 percent of total contributions in a tax year.


Majority Opinion in Bonta.  In Bonta, petitioner Americans for Prosperity Foundation was a charity devoted to education and training about free society and free market principles, civil liberties, immigration reform and limits on government. Thomas More Law Center, the other petitioner, was a public interest law firm with a mission of protecting religious freedom, free speech, family values and the sanctity of human life.  Petitioners filed suit in the Central District of California against California AG office when the office began enforcing the Schedule B disclosure requirement in 2010 by threatening to revoke registration of charities to solicit funds in California.  After appeals to the Ninth Circuit and remands back to District Court, the Supreme Court granted certiorari.  


The Supreme Court in the majority opinion applied exacting scrutiny as the legal standard for balancing compelled disclosure of affiliation with charities against donors’ First Amendment right of freedom of association via donations to groups engaged in advocacy. The Supreme Court stated that exacting scrutiny “requires that there be ‘a substantial relation between the disclosure requirement and a sufficiently important governmental interest,.. and that the disclosure requirement be narrowly tailored to the interest it promotes”.


The Supreme Court found that the Ninth Circuit, in reversing the District Court, erroneously failed to apply a narrow tailoring requirement in Supreme Court jurisprudence. The Court held that “the up-front collection of Schedule Bs is facially unconstitutional, because it fails exacting scrutiny in a ‘substantial number of its applications… judged in relation to [its] plainly legitimate sweep." Accordingly, the California AG was enjoined from enforcing the Schedule B disclosure requirement as applied to the two petitioners in Bonta.  


Concurrences and Dissent in Bonta.  In Bonta, Justices Alito, joined by Justice Gorsuch, and Justice Thomas delivered separate, concurring opinions.  Of note, Justice Thomas, concurring in the majority's judgment, departed from the majority in opining that the holding was limited to the litigants in the case, and did not facially invalidate the Schedule B requirement as to any future application.  Justice Sotomayor, joined by Justices Breyer and Kagan, delivered a 25-page dissent, focusing in part on the potential threats to contributors as a result of their information made public, rather than actual harm.  The limiting concurrence by Justice Thomas may impact the way in which lower courts interpret the breadth of the Court's holding in Bonta, and how the Supreme Court might address any subsequent compelling disclosure litigation in the First Amendment context.   


Conclusion and Action Items for Charities.  The holding in Bonta has potential impact on ability of state AGs to enforce Schedule B disclosure laws against charities that are subject to state registration requirements. The majority in Bonta struck down the California Schedule B disclosure rule, finding that it was overbroad and necessary confidentiality protections were absent. Some state registration laws, such as pending legislation in New York, senate bill S4817-A generally attempts to impose confidentiality treatment on required submissions by charities to the New York AG, including Schedule B information. However, at issue in the majority opinion in Bonta primarily was failure actually to preserve confidentiality of reported contributor information, rather than statutory language. Thus, other state AGs may take the position that the confidentiality safeguards under their respective state laws operate sufficiently to meet the exacting scrutiny test under Bonta.


Presently, tax-exempt organizations registered to solicit contributions in U.S. states, including California and New York, should continue to comply with any existing Schedule B disclosure laws or regulations. However, charities and other tax-exempt registrants would find advisable to monitor developments at respective AG offices and state legislatures. Affected ax-exempt organizations should consult with counsel on required filings in the event of any amendments to applicable state registration laws or regulations or AG pronouncements on enforcement of Schedule B requirements.

COBRA Premium Assistance Requirements for Exempt Employers

Posted on June 7, 2021 at 10:30 AM

 

On April 7, 2021, the United States Department of Labor (“DOL”) issued guidance interpreting the premium assistance requirements for employers providing group health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). On May 18, 2021, Treasury and the IRS published Notice 2021-31 containing interpretive tax guidance for COBRA premium assistance, including the employment tax credit available for sponsoring employers. COBRA was further amended on March 11, 2021 by the American Rescue Plan Act of 2021 (“ARPA”) to assist employees who lost health insurance coverage amid the Covid-19 pandemic.


COBRA requirements are set forth in the Internal Revenue Code of 1986, as amended (“Code”), the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Public Health Service Act of 1944, as amended (“PHSA”). The April 7 Frequently Asked Questions follow Disaster Relief Notice 2021-01, issued by DOL with concurrence from the Treasury on February 26, 2021, and prior joint department guidance, which extended certain periods and dates for group health plans to comply with Code section 4980B continuation coverage requirements as the result of the Covid pandemic.


Thus. the DOL, the IRS and the Department of Health and Human Services (“HHS”) share jurisdiction over group health plan administration and compliance with COBRA. Whereas DOL has interpretive authority over notice and disclosure requirements, the IRS is authorized to issue regulations defining the required continuation coverage. HHS is authorized to interpret COBRA as it applies to state and local government plan sponsors, in conformity with DOL and IRS rules.


ARPA section 9501(a) provides that assistance eligible individuals, who generally are former employees or employees with reduced hours enrolled in a group health plan offered by a plan sponsor, are exempt from paying monthly premiums for COBRA continuation coverage during the premium assistance period. The continued coverage premium amounts are not payable by employee to employer or insurer.


Instead, ARPA section 9501(b)(1) provides an employment tax credit (premium assistance credit or "PAC") for payments of premiums under extended COBRA coverage provided to terminated employees under a group health plan from April 1, 2021 through September 30, 2021 (the “premium assistance period”). Terminated employees who receive premium assistance exclude the amounts of premiums that are paid by employer from gross income. The income exclusion provisions are effective for taxable years of employees ending after March 11, 2021, the date of the enactment of ARPA.


On April 7, DOL published extensive guidance and model notices for employers providing premium credit assistance. Generally, not all employers sponsoring group health plans must offer COBRA coverage. COBRA exempts generally employers with fewer than twenty full-time employees, as well as certain religious organizations and their affiliates. However, ARPA rules apply to insured group health plans maintained by small employers and other exempt employers subject to State "mini-COBRA" laws discussed further below.


ARPA section 9501(b) provides that in the case of an employer not subject to COBRA continuation provisions in the Code, ERISA or PHSA, the person to whom the premiums are payable, and thus, the person eligible for the employment tax credit, is the insurer, rather than the employer. On May 18, 2021, Treasury and IRS issued Notice 2021-31 (the "Notice") providing extensive guidance for interpreting the ARPA premium assistance provisions. The Notice addresses applicability of ARPA premium assistance provisions to small employers and other exempt employers.


Although small employers are exempt from Federal COBRA, a majority of the States have enacted "mini-COBRA" statutes that require small employers to provide continuation coverage similar to COBRA under analogous circumstances, including involuntary termination, reduction in hours of similar qualifying events. The Notice clarifies applicability of ARPA premium assistance requirements to small employers subject to mini-COBRA. In particular, the Notice sheds light on whether small employers subject to mini-COBRA are exempt from paying premium assistance amounts.


COBRA premium assistance credit previously was made available in connection with the "Great Recession" of 2008 - 2009 under section 3001 of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5 (2009) ("ARRA"), and provided subsidized COBRA coverage, generally to terminated employees. ARRA offered a 65 percent subsidy for COBRA premiums paid generally by involuntarily terminated employees, which phased out above an annual salary of $125,000 and was extended by subsequent legislation to apply for 15 months. By contrast, ARPA offers generally a 100 percent subsidy for involuntarily for maximum duration of six months, without an income cap.


Employers subject to mini-COBRA laws may have various arrangements with insurers for collection and payment of employee premiums. Furthermore, an employer voluntarily may pay all or a portion of the COBRA premium of an employee under various arrangements with insurer. Thus, for example, insurer and employer may agree that employer will make payments of premium to the insurer and subsequently be reimbursed by employee. Alternatively, an insurer may accept direct payments of premium from employee, and employer may reimburse employee for the payments or pay the employee the amount of premium in advance as severance.


There also are instances, in which the employer does not pay or reimburse any portion of employee COBRA premium. In those cases, an employer may have an obligation to collect and remit the premium payments to insurer, pursuant to certain mini-COBRA State statutes. On the other hand, absent a statutory requirement, an employee may make direct payments of COBRA premiums to insurer, without employer as intermediary.


If a small employer only must collect any premium payments from employee and remit the amounts to insurer, neither ARPA section 9501(a)(1)(A) nor Notice 2021-31 require the employer to make premium assistance payments. ARPA section 9501(a)(1)(A) states in passive voice that an assistance eligible individual (AEI) “shall be treated for purposes of any COBRA continuation provision as having paid the full amount of such premium.” Thus, if an employer is a mere intermediary and is not subject to COBRA rules under ERISA or the Code, there is no affirmative requirement under ARPA for the employer to make up any deficit in premium assistance amount. Instead, the insurer, which also is entitled to the premium assistance credit, must treat the AEI as having paid the full amount of the premium.


A small employer subject to a mini-COBRA statute may be contractually obligated to make COBRA premium payments to insurer. In this scenario, ARPA section 9501(a)(1)(A) does not exempt contractually the employer from paying the portion of the COBRA premium to the insurer. This rule applies despite the fact that the insurer, and not the small employer subject to mini-COBRA, would be entitled to the PAC under Code section 6432(a). The 2009 ARRA Notice clarified that, even if a small employer subject to mini-COBRA paid the remainder of the COBRA premium to the insurer, along with the subsidized amount collected from employee, the employer would not be eligible for a PAC for any portion of the COBRA premium.


On the other hand, ARPA section 9501(a)(1)(A) also does not penalize the employer for failure to make the employer portion of the premium payment to the insurer subject to an agreement. The reason is that, a small employer generally is exempt from COBRA. Instead, under ARPA section 9501(a)(1)(A), the insurer must treat the employee as having made the premium payment in full, and may claim the PAC for the amount of the premium or incur ERISA or Code section 4980B liability. But the insurer would have recourse at common law against employer for breach of contract due to failure of employer to pay its portion of the COBRA premium to the insurer.


Under Notice 2009-27 with respect to the ARRA premium assistance credit, if insurer and employer agreed that the insurer would collect the premiums directly from individuals, the insurer would have to treat the 35 percent payment as having been made in full even if employer failed to remit any payment. The insurer would be liable for excise tax under Code section 4980B for failure to provide benefits. However, by contrast to a small employer subject to mini-COBRA, an employer subject to COBRA also would incur excise tax liability along with the insurer under Code section 4980B for failure to pay the COBRA premium assistance amount. Small employers and other employers exempt from COBRA but subject to State mini-COBRA statutes should take note of the requirements under ARPA, ERISA and the Code and review their group health plan documents, including arrangements with group health plan providers, to ensure current compliance with the COBRA continuation coverage legislation.

 


IRS Confirms Temporary Full Deduction for Employee Virtual Business Meals

Posted on April 8, 2021 at 11:45 AM


On April 8, 2021, the IRS issued Notice 2021-25 (the "Notice") confirming availability of a temporary 100-percent deduction under section 274 of the Internal Revenue Code of 1986, as amended ("Code") for meals ordered by employees for virtual events from restaurants. Code section 274(n) recently was amended by coronavirus relief legislation under section 210 of the Taxpayer Certainty and Disaster Relief Tax Act of 2020 (the "Taxpayer Certainty Act"). The provision permitted employers to expense fully certain business meals after December 31, 2020, and before January 1, 2023 provided by a restaurant. Thus, section 210 of the Taxpayer Certainty Act temporarily reversed an amendment to Code section 274 under the 2017 Tax Cuts and Jobs Act ("TCJA"), which, among other statutory changes, limited the deduction for certain business meals to 50 percent of the amount of expense.

 

The Firm's January 2021 article in the Bloomberg Daily Tax Report argued that section 210 of the Taxpayer Certainty Act, interpreted in conjunction with final Treasury regulations under Code section 274 issued in September 2020 permitted employers to deduct fully business meals purchased for employees working from home from restaurants or caterers for virtual networking events, even though the food or beverages were not consumed on restaurant premises. The Notice confirms this position.

 

The Notice clarifies the amendment to Code section 274(n) under section 210 of the Taxpayer Certainty Act. The Notice provides that the term restaurant for purposes of the exception under Code section 274(n)(2)(D) to the 50-percent business meal deduction limitation means "a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business's premises."

 

On the other hand, a restaurant does not include purveyors of pre-packaged consumables under the Notice, such as a grocery store, wine store or convenience store. Employer cafeterias similarly are excluded. Such expenses continue to be subject to the 50-percent limitation on the deduction. Thus, cafeteria meals provided by employer to its employees continue to be only partially deductible until the deduction expires as of December 31, 2025 under the TCJA amendment. Employers should take note of the relief provided by the Notice, claiming the temporary 100-percent deduction for consumables ordered from restaurants or catering providers for virtual events scheduled for employees with ongoing work-from-home arrangements.


Compliance Items for Foreign Investors Under the Corporate Transparency Act of 2020

Posted on January 6, 2021 at 4:20 PM


Introduction. On January 1, 2021, the United States Senate passed H.R. 6395, the National Defense Authorization Act, 2021 (“NDAA”) over the Presidential veto. The NDAA is slated to be enacted. Division F of the NDAA incorporates the Corporate Transparency Act of 2020 (“CTA”). An earlier version of the CTA, H.R. 2513, was passed by the House of Representatives in 2019. The CTA substantially revised and expanded H.R. 2513. The CTA adds section 5336 to the Bank Secrecy Act, 21 U.S.C. sections 5311 et seq., originally enacted in 1970 (“BSA”).


Legislative Intent. The Conference Report for the NDAA states the purpose of the CTA is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the U.S. Government. The Conference Report states, in part, that the disclosure is intended to target “bad actors who own or control businesses that act as ‘fronts’ or shell companies on behalf of those conducting illicit activities”.

 

Scope of Confidentiality. Under the CTA, beneficial ownership (“BO”) information primarily is for use in law enforcement and national security efforts. The CTA requires BO information to be reported to the Financial Crimes Enforcement Network (“FinCEN”), the financial intelligence unit of the U.S. Department of Treasury (“Treasury”). The BO reports generally are not made publicly available. Rather, as the Conference Report avers, the BO information “will be kept confidential and treated as sensitive information, protected under the highest information security standards.”

 

Thus, under BSA section 5336(c)(2)(B)(i)(II), the reported BO information may be permitted to be disclosed to State or local governments generally only by court order. Another exception to the general prohibition on disclosure of BO information includes disclosure in response to requests of a Federal agency on behalf of foreign authorities for an investigation or other activity. Under BSA section 5336(c)(2)(B)(ii)(II)(aa), giving over BO information to a foreign authority may be for the purpose of compliance with treaty, agreement or convention provisions and involve publicly disclosing any BO information received. Under BSA section 5336(c)(2)(B)(iii), BO information may be disclosed in response to requests by financial institutions for compliance with customer due diligence requirements. BSA section 5336(c)(2)(B)(iv) permits restricted disclosure of BO information in response to requests by Federal regulatory agencies.

 

Whose Information Must Be Reported? A reporting company must be report to FinCEN information for each applicant and each beneficial owner. Under BSA section 5336(a)(2), an applicant is generally any individual who files an application to form a corporation, limited liability company (“LLC”) or other similar entity under State law. Alternatively, an applicant may be any individual who registers or files an application under State law to register a corporation, LLC or similar entity that initially was formed under the laws of a foreign country, in order to do business in the United States.

 

On the other hand, a beneficial owner under BSA section 5336(a)(3) is an individual other than certain minors, nominees, employees, heirs or creditors, who either exercise substantial control over the entity or own or control not less than 25 percent of the ownership interests of the entity. To trigger CTA reporting obligations, the entity must be a reporting company, defined in BSA section 5336(a)(11). A reporting company is a corporation, LLC or similar entity formed either under the laws of a State or a foreign country and authorized to do business in the United States.

 

BSA section 5336(a)(11)(B) contains broad exceptions for certain entities or their subsidiaries from CTA disclosure requirements, including broker dealers, pooled investment vehicles, publicly traded or SEC reporting companies, banks, exchanges, clearing houses, investment advisers, insurance companies, commodity exchanges, accounting firms, utilities, tax-exempt organizations, businesses with U.S. physical presence, more than 20 full-time U.S. employees and annual revenues exceeding $5,000,000, or for certain entities without any foreign ownership.

 

Scope and Manner of BO Information Reporting. The scope of BO information reporting requirements under the CTA shall be set forth in Treasury regulations, pursuant to BSA section 5336(b)(1). A reporting company will be required to submit a FinCEN report in compliance with Treasury regulations to be promulgated under legislative authority in BSA section 5336. Pursuant to BSA section 5336(b)(3), in furtherance of compliance with CTA, FinCEN will issue to each individual or entity that must disclose information under BSA section 5336(b)(2) a unique identifying number (the “FinCEN Identifier”).

 

In general, under BSA section 5336(b)(2)(A), the FinCEN report must contain the name, date of birth, address, and either a social security number, tax ID or the FinCEN Identifier of each applicant and each beneficial owner of the reporting company. Under BSA section 5336(b)(3)(A)(ii), the person with a FinCEN Identifier will use the number for FinCEN submissions updating BO information as required under BSA section 5336(b)(1)(D). Limited FinCEN disclosure applies to BSA section 5336(a)(11)(B) exempt entities or their subsidiaries.

 

A reporting company may have to disclose BO information of an applicant or beneficial owner who was issued a FinCEN Identifier. In that case, stating only the FinCEN Identifier of the individual in the report would be sufficient disclosure under BSA section 5336(b)(2). Conversely, a reporting company may have to include BO information of a beneficial owner who may hold the ownership interest through a parent entity of the reporting company. In that case, the reporting company may disclose only the FinCEN Identifier of the parent entity in lieu of the BO information of the individual for purposes of complying with BSA section 5336(b)(2)(A).


Timing of Implementation of Reporting Requirements. FinCEN reporting at present is not required for reporting companies, their beneficial owners or applicants. Instead, under BSA section 5336(b)(5), reporting will be required as of the effective date of final Treasury regulations that will be promulgated under BSA section 5336. The statute mandates that final Treasury regulations take effect not later than one year after the date of enactment of the CTA.

 

After the final Treasury regulations implementing the CTA requirements take effect, reporting companies in existence as of the effective date of the regulations will have two years to comply with the CTA reporting rules. In turn, reporting companies formed after the effective date of the Treasury regulations generally will have to file applicable FinCEN reports “at the time of” formation or registration to do business in the United States under the laws of a State. In addition, a reporting company will have to file an updated FinCEN report within a year of a change in beneficial ownership, as shall be prescribed in the final Treasury regulations.

 

Action Items. Corporations, LLCs and other similar entities either formed under the law of a U.S. jurisdiction or a foreign country must analyze the prospective applicability of FinCEN reporting requirements under the amended BSA, which may become effective within the current calendar year. Beneficial owners, investors and creditors must determine the chain of beneficial ownership of each entity in a holding company structure in order to comply with forthcoming FinCEN reporting rules or to ascertain whether exceptions under the BSA would apply to such individuals or entities. Specific compliance standards have not yet been promulgated, but foreign investors and foreign-owned entities should consult with U.S. tax counsel to ensure compliance in anticipation of the new beneficial ownership information reporting regime.

 


Full Deductibility of Business Meals for Employee Virtual Events Under H.R. 133

Posted on December 22, 2020 at 1:35 AM


On December 21, 2020, Congress released the text of, and subsequently voted to approve the Consolidated Appropriations Act, 2021 (the "Act"), more than 5,000 pages in length.  The Act provides extensive year-end Covid-19 relief. Section 210 of the Taxpayer Certainty and Disaster Relief Tax Act of 2020 (“Taxpayer Certainty Act”), part of the Covid-19 relief package, allows an employer a full deduction for certain business meals the expense for which an employer paid or incurred after December 31, 2020 and before January 1, 2023. The amendment to Section 274(n) of the Internal Revenue Code of 1986, as amended (“Code”) addresses the adverse effect Congress has anticipated the Covid-19 pandemic to continue to impart on the struggling restaurant industry, given State or local government-mandated shutdowns in certain areas in the United States. The language in section 210(a) of the Taxpayer Certainty Act would assist the restaurant industry by allowing an employer to expense 100 percent of an amount paid or incurred for food or beverages provided by a restaurant, which otherwise is allowable as an income tax deduction under the Code.


A majority of employers have implemented work from home arrangements for employees. Business meetings and employee social gatherings that at times would have taken place on premises have been conducted virtually. Nevertheless, employers may want to deduct costs of food consumables for employee virtual get-togethers that, instead of being catered by a restaurant, may have been acquired at other types of venues. Subject to clarifying Treasury and IRS guidance, food and beverage expenses for virtual meetings could be deductible under Section 274(e)(5), as expenses incurred by an employer directly related to business meetings of its employees, stockholders, agents, or directors. This exception would be subject to the 50 percent deduction limitation in Section 274(n)(1).


Also, an employer could deduct edible goods expenses for employee virtual happy hours under Section 274(e)(4) relating to employee recreational activities. Excepted employee recreational expenses are excluded from the 50 percent deductibility ceiling under Section 274(n)(2)(A), similarly to meals ordered from a restaurant under new Section 274(n)(2)(D). Section 210 of the Taxpayer Certainty Act effectively incentivizes employers to order food and beverages from restaurants for employee meetings or social activities. However, in the virtual meeting context, restaurant deliveries to numerous employee home bases may not be feasible.


The Act is expected to be signed into law by the President imminently. Treasury and the IRS may issue interpretive guidance clarifying the definition of the term “restaurant” for purposes of section 210 of the Taxpayer Certainty Act and including within its scope caterers or similar providers of food and beverages for employee events, which could be delivered effectively to multiple employee locations.


Payroll Tax Deferral Under Notice 2020-65, FFCRA and CARES Act

Posted on September 4, 2020 at 7:25 AM


Introduction

On August 8, 2020, the President of the United States issued an executive order, 85 Fed. Reg. 49,857 (Aug. 13, 2020) (“Presidential Memorandum”) directing the United States Secretary of the Treasury (“Treasury”) to authorize deferral by employers, generally deemed affected by Covid-19, a Presidentially declared disaster pursuant to section 501(b) of the Stafford Act, 42 U.S.C. 5121 et seq (“Affected Taxpayers”), of withholding, deposit and payment of certain payroll taxes until January 1, 2021.

 

On August 28, 2020, Treasury and the IRS issued Notice 2020-65 implementing the Presidential Memorandum and setting forth procedures and requirements for employers in connection with deferral of the employee portion of social security tax under the Federal Insurance Contribution Act, 26 U.S.C. section 3101 et seq (“FICA”) or the Railroad Retirement Tax Act, 26 U.S.C. section 3201 et seq (“RRTA”) equivalent (the “Notice”).

 

This article discusses the payroll tax deferral requirements in the Notice and alerts employers to required actions or considerations in deferring withholding, deposit and payment of employee portion of withholding taxes and interaction with other Covid-19 payroll tax relief.

 

Deferral Dates

 

The period, for which the Applicable Taxes may be deferred begins September 1, 2020 and ends December 31, 2020 (for purposes of this article, the “Deferral Period”). The period, during which the deferred Applicable Taxes must be paid to the IRS begins on January 1, 2021 and ends April 30, 2021 (for purposes of this article, the “Payment Period”). Thus, employers must deposit all of the Deferred Applicable Taxes within four months of end of the Deferral Period. The Notice clarifies that the beginning date of the Deferral Period is based on the payroll date, not the first day of the payroll period.

 

Limitation on Applicable Wages

 

The Applicable Wages limitation is determined based on each payroll period, so the wages or compensation are not aggregated or annualized for purposes of determining eligibility for deferral of Applicable Taxes. As the accompanying news release, IR-2020-195 (Aug. 28, 2020) clarifies, the limitation is an amount that is below $4,000 per bi-weekly payroll period. The limitation of $104,000 of Applicable Wages, if annualized, is somewhat below the wage base for aggregate 12.4 percent social security tax or RRTA equivalent payable by employer and employee, which is $137,700 for earnings in calendar year 2020.

 

In the event an employer pays wages weekly or more frequently, the Presidential Memorandum provides that the limitation amount is prorated with respect to other pay periods. Thus, in the event of a weekly payroll schedule, the limitation on wages per payroll period would be $2,000. The Notice does not clarify whether an employer may reduce wages, subject to applicable federal, state and local tax, labor and employment laws, including without limitation the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) to meet the Applicable Wages threshold.

 

Scope of Applicable Wages

 

Applicable Taxes on wages or compensation, which may be deferred under the Notice, apply to amounts deemed wages under section (“Section”) 3121(a) of the Internal Revenue Code of 1986, as amended (“Code”) or compensation under Section 3231(e) for purposes of the Railroad Retirement Tax Act (“RRTA”). Thus, Applicable Wages exclude parsonage, or amounts paid to certain clergy workers for housing and related expenses under Section 107, which are not withheld or reported as wages on IRS Form W-2. Applicable Wages also exclude qualified plan contributions. Likewise, Applicable Wages exclude certain fringe benefits, and employer contributions to certain accident, health or medical expense reimbursement plans not subject to employment taxes or withholding and excludable from employee gross income under the Code.

 

Interaction with FFCRA and CARES Act Payroll Credits, Covid-19 PTO Programs

 

In addition, Applicable Wages exclude amounts of qualified sick leave or family leave wages under the Families First Coronavirus Response Act, Pub. L. No. 116-127 (2020) (“FFCRA”), allocable qualified health plan expenses and creditable employer portion of FICA Medicare tax on such wages. Furthermore, Applicable Wages exclude the creditable portion of qualified wages, including allocable health plan expenses subject to an employee retention credit available under the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (2020) (“CARES Act”).

 

Also, Applicable Wages exclude surrendered or deposited leave from wages of donor employees pursuant to a qualified employer-sponsored medical leave-sharing plan originally authorized under Revenue Ruling 90-29, a bona fide employer-sponsored major disaster leave-sharing plan under IRS Notice 2006-59 and IRS FAQs released on August 3, 2020, or a Covid-19 leave-based donation program under the safe harbor in IRS Notice 2020-46.

 

Scope of Applicable Taxes

 

Applicable Taxes include only the employee portion of the FICA social security tax under Section 3101(a) or the RRTA equivalent under Section 3201(a). Thus, employer portion of FICA social security tax under Section 3111(a), FICA Medicare tax (Sections 3101(b), 3111(b)), the Federal Unemployment Tax Act, 26 U.S.C. section 3301 et seq (“FUTA”) tax, state or local taxes on employee compensation, including state unemployment insurance paid by employers are excluded from deferral relief in the Notice.

 

Further, Applicable Taxes are distinguished in scope from withheld payroll taxes, which an employer may retain in anticipation of a payroll credit under FFCRA or the CARES Act, and for which an employer did not file an advance credit payment request on IRS Form 7200. The payroll credits generally are effective until December 31, 2020. Employers generally may reduce deposit, but not withholding, of the employer and employee portion of FICA taxes or of RRTA tax amounts attributable to the applicable FICA social security tax rate in anticipation of receiving refundable employment tax credits due to Covid-19 circumstances.

 

The excess amount of the credit not applied to employer social security tax liability for a calendar quarter is refundable to the employer by filing Form 7200. Waiver of failure to deposit penalty under Section 6656 applied to retained payroll taxes that did not exceed the actual amount of allowed payroll credit for the calendar quarter. Similar relief with respect to the refundable tax credits was available to self-employed individuals, including certain religious workers within the meaning of Section 3401(a)(9), with respect to estimated tax payments for a calendar quarter.

 

Under FFCRA, qualified sick leave or family leave wages paid to employees were creditable only against the employer portion of FICA social security tax or RRTA equivalent. Thus, the employer portion of Medicare tax on qualified sick leave or family wages was creditable together with the qualified sick leave or family leave wages and allocable qualified health plan expenses. Conversely, qualified sick leave or family leave wages, allocable qualified health plan expenses or creditable Medicare tax liability were not creditable against employer portion of Medicare tax. Therefore, an employer may reduce deposit of Medicare tax in anticipation of payroll credits for a calendar quarter. However, the withheld Medicare tax amounts generally would be deposited on the next regular deposit date, absent anticipation of additional applicable payroll credits.

 

In addition, CARES Act section 2302 permits employers to defer the employer portion of FICA social security tax or the RRTA tax amount under Sections 3211(a) or 3221(a) attributable to the tax rate set forth in Section 3111(a) beginning March 27, 2020 and until January 1, 2021. Self-employed individuals may obtain similar relief with respect to 50 percent of tax liability under Self-Employment Tax Act, 26 U.S.C. section 1401 et seq (“SETA”), which is equivalent to the combined employer and employee portions of FICA social security and Medicare taxes.

 

Section 4 of the Flexibility Act, Pub. L. No. 116-142 (2020), extended deferral under CARES Act section 2302 to employers receiving forgiveness of all or a portion of Paycheck Protection Program (“PPP”) loan amounts under CARES Act section 1106. PPP is administered by the Small Business Administration (“SBA”) pursuant to new section 7(a)(36) of the Small Business Act, Pub. L. No. 85-536 (1953). Section 4 of the Flexibility Act also applied to recipients of forgiveness of loans issued by certain non-SBA lenders pursuant to CARES Act section 1109.

 

Payment of Deferred Applicable Taxes; Penalties for Noncompliance with the Notice

 

Failure to withhold and pay the Deferred Applicable Taxes timely would result in penalties, interest and additions to tax accruing to the Affected Taxpayer beginning May 1, 2021. The Notice provides that an employer must withhold and pay over the Deferred Applicable Taxes ratably during the Payment Period. The Notice does not clarify how the “ratable” withholding and deposit requirements apply. Without clarification, an employer might allocate the Deferred Applicable Taxes equally among the payroll dates between January 1, 2021 and April 30, 2021.

 

Thus, an employer may have Deferred Applicable Taxes only for the fourth quarter of calendar year 2020. A reasonable interpretation of the ratable withholding and deposit rule may require an employer to apportion the total amount of Deferred Applicable Taxes equally among the payroll periods beginning on or after January 1, 2021, the payroll dates for which are included within the Payment Period. Alternatively, the Notice allows an Affected Taxpayer to make other arrangements with the employee, if necessary, to collect the total Deferred Applicable Taxes.

 

Considerations and Action Items for Employers with Respect to Payroll Tax Deferral

 

IRS Notice 2020-65 permits only deferral, and not forgiveness of employee portion of social security tax or equivalent railroad tax for the period from September 1, 2020 to December 31, 2020. The deferred tax liability must be paid within four months, from January 1, 2021 to April 30, 2021 to avoid accrual of interest, penalties or additions to tax under the Code for failure by employer to withhold or deposit the employee portion of payroll taxes. The relief is optional and employers may have alternate methods for collecting deferred payroll tax amounts from employees to meet the payment requirements.

 

However, employers should consider in general whether additional economic hardship to employees may result from the deferral, the risk of incurring penalties or interest for failure to comply timely with the Notice requirements, and the additional operating costs associated with implementing deferred withholding, deposit and reporting. Many employers have claimed refundable payroll credits under FFCRA or CARES Act or deferred employer portion of FICA social security tax or RRTA equivalent under the CARES Act. Such employers must comply with both the deadlines for deferring deposit of employer or employee portions of withholding taxes and the due dates for withholding and payment of Applicable Taxes under Notice 2020-65.

 

Employers should consult with tax counsel regarding applicability of reduced deposits in anticipation of FFCRA or CARES Act payroll credits, employer social security tax deferral under CARES Act section 2302, as amended, and employee payroll tax deferral under the Notice to ensure compliance with employment tax withholding, deposit or payment requirements with respect to wages or compensation for pay periods through December 31, 2020.


 


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