On August 8, 2020, President Trump signed a series of executive orders following a standstill in COVID-19 relief negotiations. These executive orders include a payroll tax “holiday” for workers earning under $100,000, a new round of enhanced unemployment benefits, a federal eviction moratorium, and extended deferral of student loan repayments.
These executive orders arrive about two weeks after the Senate Republicans passed their version of CARES Act. 2.0, the Health, Economic Assistance, Liability Protection and School Act (“HEALS Act”) and about one week after enhanced unemployment benefits under the CARES Act expired. The President has issued these emergency orders in response to Congress’ inability to reach an agreement on the next COVID-19 stimulus package.
Although one or more of the orders may be challenged in court, taxpayers may rely on them for the present time. Notably, such reliance may come at a cost to the extent that many questions remain unanswered. Taxpayers should expect further clarification in the coming weeks.
Payroll Tax “Holiday”
The first order directs the Secretary of the Treasury to defer the employee’s portion of Social Security and Medicare taxes for wages paid during the period of September 1, 2020 through December 31, 2020. Thus, this deferral adds on to the CARES Act’s existing provision that defers the employer’s portion of payroll taxes. However, there are a few crucial uncertainties in this order, which will hopefully be clarified soon in Treasury guidance.
To qualify, an employee must earn less than $100,000 per year, calculated on a pre-tax basis (i.e., approximately $104,000). Amounts that are deferred will not incur any penalties, interest, or addition to the tax. Although the President has stated his desire to forgive the payroll tax deferment and establish a permanent payroll tax cut, in theory, the deferred taxes must still be remitted to the government in 2021 unless further action is taken by Congress.
Extending Enhanced Unemployment Benefits
The second order authorizes $400 in weekly unemployment aid, which is a middle ground between the $600 benefit in the HEROES Act and the $200 benefit in the HEALS Act. This aid will be offered until the end of 2020. However, it is a shared burden. Procedurally, the order directs Federal Emergency Management Agency (“FEMA”) to provide $300 of the benefits and calls upon the states to use their Corona Relief Fund (“CRF”) allocation to contribute the remaining $100. Thus, it remains to be seen how this will play out.
Federal Eviction Moratorium
The third order extends a federal eviction moratorium for renters and homeowners. The order lacks specific details, including an end date, and only applies to federally subsidized housing and federally backed housing.
Student Loan Repayments
In the fourth order, President Trump directs the Secretary of Education to continue to defer all federal student loan repayment obligations and waive all interest on student loans held by the Department of Education until December 31, 2020.
Paycheck Protection Program
To our knowledge, neither the HEALS Act nor the HEROES Act contains provisions on the tax deductibility of business expenses that are paid with PPP loan funds. Moreover, the President did not address this issue in his executive orders.
Currently, pursuant to Notice 2020-32, which was issued on April 30, 2020, such expenses are not deductible. The IRS’s position is that deductibility would confer a double benefit by providing a tax deduction for expenses paid with tax-exempt proceeds (i.e., PPP loan forgiveness). Although several members of Congress have expressed interest in permitting tax deductibility in the next stimulus package, for now we must wait and see.
The Tax Advisory group will continue to stay abreast of COVID-19 tax developments, including the status of CARES Act 2.0. For any tax-related questions specific to this Tax Alert, please contact any of the following individuals:
Name: Meghan Andersson, JD, LLM
Office: Irvine, CA
Phone: (949) 623-0542
Name: Jason Borkes, CPA, CM&AA
Office: Irvine, CA
Phone: (949) 623-0516
Name: Mark Cook, MBA, CPA, CGMA
Office: Irvine, CA
Phone: (949) 623-0478