The effects of COVID-19 have continued to impact our daily lives and every facet of the current business landscape in America. Of all the legislation that has been implemented, the Payroll Protection Program (PPP) has garnered the most attention. ATKG released this overview a week ago, but we wanted to clarify some aspects of the program on which we have received many questions.
- What makes the PPP so attractive is that some, or all, of the loan is eligible for forgiveness. Formal guidance is still pending, but a general calculation of the loan forgiveness can be taken from the text of the CARES Act as well as the Interim Final Rule and FAQs released by Treasury.
- The loan forgiveness is equal to eight weeks of the following expenses: payroll costs, mortgage interest payments, rent, and utilities. At least 75% of the loan proceeds must be spent on payroll costs, and payroll must also make up at least 75% of the amount on which a borrower requests forgiveness. Some employers have chosen to spend the entire PPP loan on payroll, which is allowable.
- The eight-week period begins on the date the lender makes the disbursement of the PPP loan to the borrower, which must be no later than 10 calendar days from the date the loan is approved. This makes timing tricky considering how many businesses have suspended operations.
- To be eligible for forgiveness, employers must maintain their pre-pandemic employee headcount and not reduce certain employee salaries by more than 25%. Businesses have until June 30, 2020 to restore their full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- Borrowers need to maintain proper documentation to substantiate how they spend the PPP loan proceeds. It is our recommendation to deposit the loan proceeds in a separate bank account so it can be easily tracked. Be prepared to submit bank statements, copies of cancelled checks, payroll reports, copies of invoices, utility bills, and other documentation to substantiate the eligible expenditures. Since formal guidance for the forgiveness applications has not been released, we do not know what the SBA will require. Therefore, you should maintain as detailed documentation as you possibly can.
Interplay between PPP Loans and Payroll Tax Credits
- Emergency Sick and Family Leave Tax Credits
- Under the FFCRA, an employer that pays emergency sick and family leave to employees can claim a refundable tax credit equal to the amount of the emergency leave paid through December 31, 2020.
- This credit can still be claimed even if a business receives a PPP loan, but you cannot include the sick and family leave wages in your payroll cost calculation to obtain the loan or in the amount on which you request forgiveness.
- Employee Retention Credit
- Under the CARES Act, employers that continue business in 2020 can claim this refundable credit if business was fully or partially suspended or if gross receipts significantly declined as a result of the COVID pandemic.
- The credit equals 50% of qualified wages paid to employees between March 12, 2020 and December 31, 2020. The maximum wages eligible for the credit are $10,000 per employee, which means eligible employers can claim a maximum credit of $5,000 per employee.
- The receipt of a PPP loan makes your business ineligible to claim the Employee Retention Credit (whether any portion of the PPP loan is forgiven). You can, however, claim both the Employee Retention Credit and the tax credits for the emergency sick and family leave discussed above. You just must make sure the credits are not for the same wages. The wages included in the calculation of the Employee Retention Credit cannot include the sick and family leave wages for which the employer is receiving tax credits under the FFCRA.
- Deferral of Employment Tax Deposits
- The CARES Act allows employers to defer payment of the 6.2% employer share of social security tax that would be due on wages from the period beginning March 27, 2020 through December 31, 2020. The deferred employment tax must be repaid over two years in 2021 and 2022.
- An employer who receives a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer’s share of social security tax through the date the lender issues a decision to forgive the loan, without incurring failure to deposit and failure to pay penalties. Once an employer receives the decision from the lender to forgive the PPP loan, it is no longer eligible to defer deposit and payment of the employer’s share of social security tax due after that date.
- The amount of the deposit and payment of the employer’s share of social security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and must be repaid in 2021 and 2022.
The Payroll Protection Program offers an opportunity to receive tax-free loan forgiveness from Uncle Sam, but it comes with a few caveats. It is extremely important to document expenditures to be eligible for forgiveness (and to avoid hefty penalties). You must also understand how receiving a PPP loan affects the other incentives on the table. Every business is unique, and employers must strategize to determine which incentives are most advantageous. Call your ATKG representative today so we can help you make the best decision for your business.
Helpful IRS Links
- FAQs: Employee Retention Credit under the CARES Act
- FAQS: Deferral of Employment Tax Deposits and Payments Through December 31, 2020
- About Form 7200, Advance Payment of Employer Credits Due to COVID-19
ATKG Coronavirus Newsroom
Visit the ATKG Coronavirus newsroom for a complete listing of articles released by ATKG addressing the fast paced changes occurring in the US as a result of the COVID-19 pandemic.
Our Commitment to You
ATKG is committed to keeping you up to date with the latest changes during these challenging times. Though overwhelming, these changes pave the way for opportunistic tax planning. Please contact your ATKG advisor with any questions or concerns.
Padyn Giebler is a tax professional wth ATKG. He earned his bachelor’s in engineering management from the University of the Incarnate Word. Padyn went on to receive his master’s in accounting from Tarleton State University and joined ATKG in 2018.
For further information on this topic or other tax questions please contact your ATKG tax advisor at 210.733.6611 or firstname.lastname@example.org.