An employer applying for a loan under the Paycheck Protection Program (PPP) should be aware of how a PPP loan will affect the employer’s ability to take advantage of three coronavirus-related tax benefits: the Payroll Tax Deferral, the Retention Credit and Families First Coronavirus Response Act (FFCRA) Credits.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) permits employers to defer paying the employer portion of Social Security payroll taxes through December 31, 2020 (Payroll Tax Deferral). Fifty percent of the deferred taxes will be due by December 31, 2021, and the other 50% will be due December 31, 2022.
Pursuant to Internal Revenue Service guidance, employers who have obtained a PPP loan, but have not yet had the PPP loan forgiven, may take advantage of the Payroll Tax Deferral through the date the lender issues a decision to forgive the PPP loan. Once, however, the lender determines that a PPP loan is forgiven, the employer may no longer defer payment of the employer’s share of Social Security taxes. The amount of taxes deferred under the Payroll Tax Deferral up until the date that the PPP loan is forgiven continues to be deferred.
The CARES Act also provides a refundable payroll tax credit for 50% of wages paid (capped at the first $10,000 of wages paid, for a maximum credit of $5,000 per employee) to certain employees by employers affected by coronavirus, including nonprofits (Retention Credit).
Eligible employers include those whose operations have been fully or partially suspended because of a government order limiting commerce, travel or group meetings, and employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
If an employer had an average number of full-time employees in 2019 of 100 or fewer, then all employee wages are eligible for the Retention Credit, regardless of whether the employee is furloughed. If an employer had more than 100 average full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours because of their employer’s closure or reduced gross receipts are eligible for the Retention Credit.
An employer receiving the Retention Credit, however, is not permitted to obtain a PPP loan.
Employers may receive tax credits with respect to paid sick leave and paid family and medical leave required under FFCRA Credits.
An employer may receive a PPP loan and FFRCA Credits, but an employer receiving FFCRA Credits for qualified leave wages cannot treat those wages as eligible “payroll costs” for purposes of receiving forgiveness of a PPP loan.
Practice Pointer: Recent federal relief programs offer critical aid to employers affected by coronavirus. Businesses should be aware that these programs, including PPP loans and FFCRA Credits, have unique tax implications that may affect whether and how businesses may be able to utilize these programs.
Please contact Douglas Turner Coats with any questions concerning these topics.
Douglas Turner Coats
410-576-4002 • firstname.lastname@example.org
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