Deferral: When can you ask for payment deferment?

Imagine the following scenario: your company loses two of its most important clients. This may jeop­ar­dize its liquidity. Or a con­trac­tor doesn’t deliver, your pro­duc­tion stagnates, and your company suddenly faces massive revenue losses. There are many reasons why companies and in­di­vid­u­als may have dif­fi­cul­ty meeting existing payment oblig­a­tions in the short run. In these cases, it can be helpful to agree with creditors on a payment deferral to avoid negative con­se­quences caused by late payments.

In case of a deferral, a debtor will usually be required to make the payment in full by the due date and not only in part, including any interest agreed.

A deferral must be agreed upon by both parties and cannot be declared uni­lat­er­al­ly. The creditor is under no oblig­a­tion to accept a deferred payment. It is a voluntary agreement. In most cases, however, deferring payment is the better al­ter­na­tive instead of letting the debtor default.

Ad­van­tages of a deferral for the creditor:

• A creditor avoids legal actions (and as­so­ci­at­ed costs) and increases chance to enforce full claim or part thereof later.
• A creditor can charge deferral interest.
• Deferred payment halts lim­i­ta­tion period of the claim, which resumes only after deferral has expired. In this way, the deferral serves to secure claims.

Legally, a deferral agreement is a debt agreement. However, no specific legal form exists for a deferral agreement. Instead, it is usually doc­u­ment­ed in writing for the sake of being legally en­force­able later down the line.

In principle, a deferral may relate to pro­vi­sions of material or monetary assets. However, it tends to be mostly used for payment oblig­a­tions.

A debtor is granted a deferred payment if they can plausibly demon­strate why they can’t meet payments on a specific date in the fore­see­able future.

Companies that can’t make their loan payments but are able to verify that they’re ahead of a market launch of a new product, which could rectify their liquidity issues, stand a good chance of having their payment in­stall­ments deferred. Where a business faces pro­duc­tion shortages due to un­fore­seen natural cat­a­stro­phes or bank­rupt­cy of a dis­trib­u­tor, but can verify an otherwise healthy cashflow, they will also be more likely to have their request for deferral accepted.

Busi­ness­es that have ex­pe­ri­enced financial dif­fi­cul­ties for a long time and ask for a deferral without providing solid planning or reasons why their economic situation may have changed this year, will find it harder to be granted a deferred payment agreement.

A plausible reason for a deferral or sub­se­quent solvency must also be given to federal and gov­ern­ment agencies. Some official au­thor­i­ties provide clear guidance on deferred payments that debtors must adhere to. In other words, debtors may have a legal right to defer some payments.

A deferral of the amount due from a tax return will usually be subject to interest charges. When it comes to paying taxes, the IRS allows in­di­vid­u­als and companies to file tax ex­ten­sions to help avoid penalties. These can typically be filed online. Where a payment cannot be made due to in­suf­fi­cient funds, penalties of around 5% of the tax owed for every month of a late payment become due. There is also a 0.5% penalty on the failure to pay the penalty which can increase to 1%.

To avoid these kinds of penalty charges, it’s best to apply for a repayment in­stall­ment plan with the IRS at an interest rate of 0.25% for every month that an in­stall­ment is due. The tax authority also rec­om­mends that as much tax as possible is paid until the deadline to minimize interest charges.

Where a payment on a tax return cannot be made in full, a partial payment in­stall­ment agreement or offer in com­pro­mise can be applied for. However, where an in­di­vid­ual or business is un­der­go­ing bank­rupt­cy pro­ceed­ings, an offer in com­pro­mise cannot be applied for.

The IRS may also grant a delay on col­lec­tion of taxes if, for example, a business can evidence financial hardship. In effect, this means that a tax payment is deferred. A company or in­di­vid­ual would still be required to make their payment at a later stage including any interest charges. Tax deferment limits for in­di­vid­u­als and small business owners are up to $1 million and $10 million for cor­po­ra­tions.

In­her­i­tance may involve tax payments depending on the amount or type of asset inherited. In­di­vid­u­als can apply for a deferral of tax payments or a portion thereof to avoid falling victim to financial hardship because of an in­her­i­tance. Types of prop­er­ties such as capital or resource prop­er­ties and land inventory taxes become due.

In light of the con­sid­er­able financial burden on business and in­di­vid­ual tax payments, the IRS rolled out tax payment de­fer­ments in March 2020. Any amount of taxes owed will become due on July 15, 2020, instead. In­di­vid­u­als who may need more time can file a Form 4868 to request an extension on income tax returns for October 15, 2020.

In addition, the IRS removed caps on deferred payments for in­di­vid­u­als and cor­po­ra­tions. This means the $1 million and $10 million thresh­olds, re­spec­tive­ly, no longer apply. Interest and penalties for non-payments will only become due as of July 16, 2020.

The measures were im­ple­ment­ed to improve the liquidity of companies and minimize the economic damage of the health crisis.

All in­di­vid­u­als, small busi­ness­es and cor­po­ra­tions who are taxpayers can defer their tax payments.

The filing deadline for federal tax returns is now July 15, 2020. The IRS has advised taxpayers to meet original deadlines where possible to avoid overdue tax payments and interest charges.

The IRS deferred payment schedule relates to income taxes.

There has been no relief announced, yet, for federal payroll taxes, estate taxes or gift taxes. At the state level, various tax reliefs have been offered. These differ by US state.

In­di­vid­ual taxpayers who require more time to file their tax returns can file an extension online using the elec­tron­ic form to extend the deadline until October 15.

Busi­ness­es and cor­po­ra­tions will either need to file a Form 7004 for an automatic extension to file income tax or a Form 1138 to defer tax payments due to expected operating losses.

Given the high number of ap­pli­ca­tions during the coro­n­avirus pandemic, it may take a little longer to hear back from the au­thor­i­ties regarding a decision.

If you’re not sure about your ap­pli­ca­tion or how to proceed, it’s best to consult with an ac­coun­tant.

Where a debtor is unable to meet payments, a deferral may take the form of belated in­stall­ments paid to a creditor.

The rules that apply to a deferred payment also broadly apply to the payment of in­stall­ments. In other words, the debtor is not entitled to in­stall­ments, but must agree on such a payment method with a creditor. A creditor may or may not ac­com­mo­date an ap­pli­ca­tion for in­stall­ments. Interest charges will still be likely due.

If a deferral by in­stall­ment is agreed upon sub­se­quent­ly, i.e. after both parties already agreed to a deferral, these changes should be noted in writing and signed by the creditor.

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