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Tax Deferral of Employer’s Portion of Social Security Taxes Under Section 2302 of the CARES Act Now Available for PPP Borrowers Without Exception  

by Thomas Vaughn, Alexis Schostak, Asel Lindsey

Published: June, 2020

Submission: June, 2020

 



Pursuant to the Paycheck Protection Program Flexibility Act of 2020, which was enacted into law on June 5, 2020, taxpayers who take out a loan under the Paycheck Protection Program (“PPP”) of the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”), all or a portion of which is subsequently forgiven, may now also take advantage of the tax deferral of the employer’s portion of the Social Security taxes under Section 2302 of the CARES Act.


As originally enacted, Section 2302 of the CARES Act allowed employers to defer the deposit and payment of the employer’s portion of the Social Security taxes and certain railroad retirement taxes imposed under Sections 3111(a) and 3221(a) of the Internal Revenue Code (“Code”) for the period beginning on March 27, 2020, and ending before January 1, 2021 (“tax deferral”). The deferred deposits will not be subject to the failure to deposit penalty and will be treated as timely made if 50% of the deferred amount is deposited with the Internal Revenue Service on or before December 31, 2021, and the remaining 50% is deposited on or before December 31, 2022.


Although the tax deferral was generally available to all employers, Section 2302(a)(3) of the CARES Act disallowed tax deferral for an employer that received a PPP loan and subsequently had all or a portion of it forgiven under the CARES Act. Thus, once an employer received a decision from the lender that its PPP loan was forgiven under the CARES Act, the employer was no longer eligible for the deferral after that date, but could continue to defer the deposits prior to that date.


The Paycheck Protection Program Flexibility Act amended the tax deferral provisions of Section 2302 by permanently removing the exception under Section 2302(a)(3) effective retroactively as of March 27, 2020, the original date of enactment of the CARES Act. Pursuant to this change, employers that receive PPP loans may take advantage of the tax deferral regardless of whether or not their PPP loans are subsequently forgiven. This change should be of great benefit to struggling employers who may now utilize both the PPP and the tax deferral, especially given the fact that employment taxes are not taken into account in calculating the forgivable component of a PPP loan.


If you have any questions, please contact Asel Lindsey (210-554-5298 or [email protected]), Thomas Vaughn (313-568-6524 or [email protected]), Alexis Schostak (248-203-0598 or [email protected]), or your relationship contact at Dykema.


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