Collins | COVID-19 Effects Extend To Company Taxes
Last week, Mark Hamrick, journalist and senior economic analyst, Washington bureau chief at Bankrate.com, spoke to our Media Credit & Collections Virtual Workshop participants about the latest economic news out of D.C. and other factors that affect advertiser credit risk. I had to laugh when, in response to an attendee question, he simply held up a well-worn yellow sticky note on which he’d written, “#2020.”
The disruption that defines 2020 seems to extend into every corner of our professional and personal lives. It’s even affecting the tax calculations and reporting responsibilities for media businesses’ accounting and financial professionals. Nicholas Sanchez, tax attorney and partner at Miller Kaplan, recently outlined three of these changes in an article for MFM’s member magazine, The Financial Manager.
Paycheck Protection Program (PPP)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 created the Payroll Protection Program. This allowed businesses to apply for potentially forgivable loans to cover expenses such as payroll, employee health care, rent, utilities and some interest expenses.
Sanchez says: “To the extent that the loans are used for these specific allowable expenses over the ‘covered period’ … PPP loans may be forgiven.” That is great. The issue, although not completely unexpected, is that allowable expenses paid with these funds may not be taken as deductions from income on 2020 tax returns. This means that accounting or financial professionals working for businesses that received PPP loans must separate all expenses paid with the loan funds and include that information in the materials provided to the company’s tax department or external tax team.
It’s interesting to note that the American Institute of CPAs (AICPA) and others have pointed out that this approach is contrary to the intent of the PPP. Sanchez notes that Congress is aware of this issue and that there have been proposals to correct the situation. That being said, “no relief is currently available.”
Deferring Payroll Tax
In early August, President Donald Trump issued a “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” The memo directed Treasury Secretary Steven Mnuchin “to defer the withholding and payment of the employee share of Social Security tax.” The deferral, as Sanchez points out, “applies to any employee whose wages are less than $4,000 during any bi-weekly pay period,” and “deferred amounts are not subject to any penalties or interest.” Additionally, the president directed Mnuchin to explore ways to turn the deferral into a permanent waiver of the tax payment.
Weeks later, the Treasury issued guidance in IRS Notice 2020-65, “Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic.” This notice clarified that “the due date for withholding of Social Security tax … on ‘applicable wages’ was to be postponed to the period running from January 1, 2021 to April 30, 2021. “Applicable wages” were defined as those to be paid by qualifying employees during the period beginning September 1, 2020 and ending December 31, 2020.
The key takeaway here is that the “affected taxpayer” (which Sanchez points out is “the employer”) “must withhold and pay the total applicable taxes that were deferred” from employee wages. The repayment period begins January 1, 2021 and ends on April 30, 2021. While subsequent clarifications indicated that employers were not obligated to participate in the tax deferral program, those that did are responsible for the repayment.
The notice did give employers the right to “make arrangements to otherwise collect the total applicable taxes from the employee.” However, employers could face unexpected exposure if employees whose taxes were deferred leave the company before the repayment is completed.
The IRS has updated the Employer’s Quarterly Federal Tax Return (Form 941) to include a line for deferred taxes. Additionally, the Service issued guidance regarding Form W-2 and the reporting of deferred Social Security taxes. The other thing participating employers will need to figure out is how to manage their payroll systems to ensure that the additional tax is both collected and paid during the first four months of 2021.
Changes To 1099 Rules
The 2015 Protecting Americans from Tax Hikes (PATH) Act included some due date changes for reporting nonemployee compensation (NEC). Instead of the prior deadline of February 28 (March 31 for those filing electronically), which continued to apply to other types of 1099 reporting, forms reporting NEC were to be filed by January 31 of each year. Sanchez says: “The PATH Act also eliminated automatic 30-day extensions to file information returns that report NEC.”
The result, Sanchez explains, was confusion. That was followed by some eye-popping fines. Those fines resulted from the IRS’ ability to assess penalties for each late form along with its power to assess the penalty “a second time.”
To eliminate this confusion, Sanchez reports that, beginning with returns for calendar year 2020, filers will have two different forms to complete and submit. The new Form 1099-NEC will be used to report nonemployee compensation. That form will be due by January 31. Form 1099-MISC (without any NEC) will be due by February 28 (or March 31 as indicated above). This means companies must make sure that data that will appear on 1099 forms is properly classified and provided to the appropriate department, or party, in time to make the deadlines.
The author concludes by saying that he has “cherrypicked three critical issues to monitor.” He also points out that “there are myriad other tax developments” that will need to be monitored at the end of this year and moving into the next. #2020!
MFM realizes the importance of these issues for media companies. Further, the role of the tax executive is changing. Technological advances, the evolving workplace environment, and recent and proposed legislation have converged to transform the tax department as we know it.
We will be taking a deeper dive into the subject during our MFM Media Tax Summit “Tackling Tax Trends,” March 2-3, 2021. A first-of-its-kind event, the summit promises to cover all the issues today’s tax professional needs to know, with a specific focus on media.
This is not your standard tax update. Attendees can expect to gain a clear understanding of what it takes to build a best-in-class tax department and what today’s CFO expects from their tax group. Additionally, the pricing is meant to encourage multiple participants from each media company.
Leading the summit are co-chairs are Sean Hetzler, senior director of tax, Tegna; Dan McGuire, tax partner, KPMG; and Paul Nesterovsky, vice president, tax, Sinclair Broadcast Group. Additional information, including an agenda and a registration form are available on the MFM website.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Facebook, Instagram, and Twitter accounts.