With guidance from the Small Business Administration (“SBA”) and the Internal Revenue Service (“IRS”) still forthcoming, and the existing guidance changing, many businesses are struggling to understand their options under the Coronavirus Aid, Relief and Economic Security Act (“Act”). We previously published guidance on the Payroll Protection Program (“PPP”) and Disaster Relief Loans which can be found here. In addition to those loan offerings, the Act also created other relief options for businesses, some of which can be used in conjunction with the PPP loans.
Employee Retention Credit
First, the Employee Retention Credit is available to employers (i) for so long as operations have been fully or partially suspended by government order relating to COVID-19 or (ii) if gross receipts are down 50% or more from receipts in the same calendar quarter of last year, in which case the credit will continue until the business’s receipts exceed 80% of the corresponding quarter in the previous year’s receipts. Special rules apply to tax-exempt organizations. No business accepting a PPP loan is eligible to take this credit, but those that are eligible will receive a credit equal to 50% of the “qualified wages” with respect to each employee in each applicable calendar quarter, up to a maximum of $10,000 in wages per employee over all eligible quarters. For purposes of this credit, “qualified wages” means wages and compensation (as defined in the Internal Revenue Code) paid between March 12, 2020 and January 1, 2021 (i) for employers of over 100 employees, wages to employees not providing services as a result of the events qualifying the employer to take the credit, and (ii) for employers of less than 100 people, (a) all wages paid as a result of a complete or partial closure, or (b) wages paid in a calendar quarter in which the employer qualifies due to a reduction in receipts, and such amount, regardless of how arising hereunder, includes the amount paid or incurred by the employer for any group health plans. If an employer takes this credit and later applies for and receives a PPP loan, the employer will have to recapture the credit taken or utilize other withheld taxes that will be required to be paid to the IRS. The IRS has issued a very helpful FAQ concerning this process which can be found here.
Credits may not be claimed for any increase in wages over those paid in the 30 days prior to eligibility. The amount of the credit is then reduced by the amount of sick and family leave credits available under the Families First Coronavirus Relief Act (“FFCRA”) and credits would be negated if certain duplications of deductions arise in limited circumstances. Since passage, the IRS clarified the reduction for FFCRA credits would be only to the extent such wages are counted in duplication, but both credits would be available to the extent the employer has both paid leave wages refunded under the FFCRA and wage credits under the Employee Retention Credit.
Employers are also eligible, in some circumstances, to request an advance payment of their credit. The credit can first be taken as a reduction against any tax deposits for the applicable quarter, but may then file a Form 7200 to claim the refund in advance.
Delay in Payment of Employer Payroll Taxes
The Act also authorizes the delay in employers paying their social security tax for the period of March 26, 2020 (the date of the Act’s passage) to December 31, 2020. One half of the deferred taxes would then be due at the end of 2021 and the other half at the end of 2022. The Act further provides limited relief for self-employment taxes for self-employed individuals, with 50% payable as usual and the remaining 50% payable in 25% increments at the end of each of 2021 and 2022. The above deferrals are all available without penalty and as immediate offsets to amounts due. Finally, as with the Employee Retention Credit, this deferral is not available for employers receiving forgiveness of a PPP loan or a related loan arising under Section 1109 of the Act; however, there is no such prohibition for self-employed individuals. There is an open question as to whether employers are permitted to defer their social security taxes for the period after securing a PPP loan, but before any forgiveness of the loan. There will likely be future guidance forthcoming on this and many other open issues under the Act.
The McNees Corporate & Tax Practice Group are continuing to follow guidance issued by the IRS on these matters. Please reach out to any member of the Corporate & Tax Practice Group with questions about the tax changes discussed in this article or other elements of the CARES Act.