The landmark CARES Act provides many Alabama employers with several options to increase liquidity and cash flow during the time of the COVID-19 pandemic. And only nine days before that legislation was enacted, the Families First Coronavirus Response Act (FFCRA) also created two other payroll tax-related incentives for certain employers, and self-employed individuals.
The incentive receiving the most attention, however, has been the Paycheck Protection Program (PPP) administered by the SBA in cooperation with the banks. As you’ve probably noted, these loans can become (federally) tax-free grants if the borrower expends a certain percentage of the loan funds on qualifying expenses, including 75% on payroll, maintains good documentation, and then applies for and receives written forgiveness from the lending bank.
But not everyone qualifies or desires to apply for a PPP loan (especially in light of the IRS’ latest announcement that payroll and other expenses paid with PPP loan funds are non-deductible). Or the criteria for forgiveness of the loan may be too strict as applied to your business operations (e.g., a local restaurant that has essentially shut down). Other businesses are concerned about the governmental (and public) scrutiny large loan recipients are expected to receive. That’s when we tax advisers are called on to recommend alternatives.
First, the CARES Act provides what can be a substantial “employee retention tax credit” against the first $10,000 of each employee’s “qualifying wages." The ERTC is limited to $5,000 per eligible employee, but there is no limit on the number of eligible employees.
The Act also gives qualifying employers the option to defer their share (6.2% of employee wages) of Social Security payroll taxes that would have otherwise been owed for the period March 27 through December 31, 2020. Electing employers must repay one-half of what is effectively an interest-free loan from the U.S. government by December 31, 2021, with the remainder to be repaid by December 31, 2022. This has reportedly become a popular option, but remember it’s still a loan – with potential personal liability asserted if not repaid when due.
Also, the FFCRA provides two refundable payroll tax credits for employees on paid leave, one based on the Family Medical Leave Act but narrowly focused on children and the unavailability of child care for them (“qualified family leave tax credit”) and a more lucrative credit based on wages paid to employees who were diagnosed with COVID-19 (or related symptoms) or who were isolated under a federal, state or local quarantine order (“qualified sick leave credit”).
All these incentives are designed to encourage employers to keep their employees on the payroll, at least for a limited period of time, in anticipation of the state or local quarantine order being lifted. We provided further explanation of these incentives in a series of webinars and in two separate Tax Alerts that are available on our law firm’s COVID-19 resource page:
How do these potentially lucrative payroll tax incentives interact with each other and with the PPP loan program?
- If an employer receives a PPP loan (even if not one dollar is forgiven), the employer cannot claim the ERTC for any of its employees, but it can claim one or both of the FFCRA refundable payroll tax credits, if the criteria are met.
- Conversely, if the employer claims the ERTC, it’s ineligible to borrow under the PPP, but it could instead borrow under the Economic Injury Disaster Loan (EIDL) Program.
- If the employer receives a PPP loan that’s forgiven even in small part, once the forgiveness is granted, the employer can’t elect to defer its share of payroll tax liability for the period from that date through December 31.
- If the employer claims the ERTC, it cannot claim the same employees as eligible for the existing Work Opportunity Tax Credit (WOTC).
- Finally, if the employer claims the ERTC for the wages of any of its employees, it cannot claim either of the FFCRA payroll tax credits on those same employees except to the extent that it paid each of its eligible employees more than $10,000 in “qualifying wages” this year (which includes health insurance benefits paid on their behalf). Thus, if the employer paid wages to a large group of employees, say $75,000 each this year, including payment of Blue Cross health insurance premiums, it could claim one or both refundable FFCRA payroll tax credits, assuming the criteria are met, for the $65,000 per employee increment.
We’ve heard the warning about the need for “modeling” every time we’ve either presented or listened to a webinar on the various CARES Act and FFCRA tax incentives, and that’s absolutely right. Employers would be wise to involve their tax advisers early in the process and to monitor the tax media daily for new or corrected guidance from the IRS or SBA.
The original article, "Businesses Beware: PPP and Payroll Tax Incentives Often Don’t Play Well Together," appeared in the Birmingham Business Journal on May 7, 2020.