PPP Flexibility Act Approaches Tax Parity Between Loan Forgiveness and Employee Retention Credits

Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (2020) (CARES Act) sets forth requirements for loans issued to small business employers, including nonprofit organizations under the Paycheck Protection Program (PPP) administered by the United States Small Business Administration (SBA). Under CARES Act section 1106, a PPP loan amount for costs and payments incurred during the covered period beginning on the origination date, may be forgiven, subject to certain limitations. Separately, an eligible employer, including a tax-exempt organization may qualify for an employee retention credit of 50% of qualified wages up to $10,000 paid to an employee under section 2301 of the CARES Act. The employee retention credit first is applied against employer portion of FICA social security tax on any wages paid to employees of the employer for a calendar quarter, for whcih the employer claims the credit. Any remaining portion of the credit is refundable to the employer. On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act). Initially, pursuant to SBA guidance published on April 15, 2020, non-payroll costs could not exceed 25% of the forgiven loan amount. Section 3 of the Flexibility Act increased the maximum percentage of PPP loan that may be used for non-payroll costs from 25% to 40% of the covered loan amount in order to qualify for forgiveness. Among other provisions of the Flexibility Act, section 4 allows delay of payment of payroll taxes by an employer that received forgiveness of PPP loan amounts under CARES Act section 1106 or of coronavirus loans issued by additional authorized lenders under CARES Act section 1109. Section 4 of Flexibility Act, which eliminated the deferral exception for eligible recipients in CARES Act section 2302(a), is effective retroactively for any PPP loan. Thus, eligible recipients may defer payment of the employer portion of FICA social security tax or equivalent RRTA taxes due for the payroll tax deferral period, beginning March 27, 2020, and ending December 31, 2020. Employers may defer deposit of 50% of the amount of the excise tax due for the deferral period until December 31, 2021. Likewise, employers may pay over to the IRS the remaining 50 percent by December 31, 2022. Generally, employers may retain certain amounts of withheld employment taxes in anticipation of receiving an employee retention credit or refundable paid leave credits under the Families First Coronavirus Response Act, Pub. L. No. 116 – 127 (2020) (FFCRA). Eligible recipients may not seek PPP financing for wages subject to FFCRA credits, and would not be eligible for a CARES Act employee retention credit. Thus, allowing deferral of payroll tax payments by employers, which received PPP loan forgiveness, was a legislative step toward achieving parity of tax benefits of financing payroll through PPP or employment tax credits. Employers seeking financial assistance for operating expenses in the current COVID-19 environment have until June 30, 2020 to apply for and be approved for a PPP loan, but generally may claim an employee retention credit for wages paid through 2020. Employers should consult with tax counsel to determine the economic benefits of each program based on individual facts and circumstances and the business, economic and tax objectives of each employer. Tax Credits and PPP Loans for Eligible Employer Payroll Costs Posted on May 6, 2020 at 7:20 PMOn May 5, 2020, three senators who are leaders of their respective congressional tax-writing committees asked Treasury in a letter to reverse Notice 2020-32 issued last week denying deductions for certain small business expenses that are subject to loan forgiveness. Section 1102(a) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-127 (2020) (“CARES Act”) sets forth rules for forgiveness of certain covered loans to small business employers under the Paycheck Protection Program (“PPP”) administered by the United States Small Business Administration (“SBA”). CARES Act section 1102 added paragraph (36) to section 7(a) of the Small Business Act, as amended (the “Act”). Generally, a covered loan (“PPP loan”) amount for costs and payments incurred during the covered period, or the 8-week period beginning on the origination date, may be forgiven, subject to certain limitations. Pursuant to SBA guidance published on April 15, 2020, non-payroll costs may not exceed 25 percent of the forgiven loan amount. Payroll costs subject to a PPP loan exclude qualified sick or family leave paid by a small business employer subject to a refundable credit under the Families First Coronavirus Response Act, Pub. L. No. 116 – 127 (2020) (“FFCRA”). In addition, if a taxpayer receives a PPP loan, the taxpayer would not be eligible for an employee retention credit of up to 50 percent of $10,000 per employee of certain qualified wages for all calendar quarters, allowed under CARES Act section 2301. Similarly to a taxpayer that receives an employee retention credit under the CARES Act but by contrast to a taxpayer allowed an FFCRA payroll credit, a recipient excludes the amount of PPP loan forgiveness from gross income under section 1106(i) of the CARES Act. Generally, factors to consider in analyzing the tax benefits of each program may vary for taxpayers and tax-exempt organizations that, unless subject to unrelated business income tax, may be indifferent to income inclusion. On April 30, 2020, the IRS issued Notice 2020-32, which provides generally that an employer may not deduct business expenses paid using PPP loan proceeds, to the extent that any forgiven portion of the PPP loan is excluded from gross income of the employer under section 1106(i) of the CARES Act. The purpose of the guidance is to prevent a double tax benefit to the employer. Pending Treasury or legislative action on Notice 2020-32, eligible employers, which include tax-exempt organizations should consult with counsel regarding tax benefits with respect to applicable qualified paid leave requirements and related credits under the FFCRA, employee retention credits under the CARES Act or PPP loan forgiveness with respect to payroll costs of the eligible employer.