Join CLA Principal Jennifer Rohen and several of our CLA professionals as we discuss refundable payroll credits, the current status of PPP, and what you can do in preparation for your next steps.
In case you missed it:
Questions and answers:
If approved for PPP, can you also take advantage of the deferment of the FICA Social Security tax up until the loan is forgiven? How does a taxpayer begin the deferral?
The Form 941, Employer's quarterly Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020). Information will be provided in the near future to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020). Once you are granted a forgiveness decision from the lender you can no longer defer.
Are income tax credits only available to organizations with fewer than 500 employees?
There are Families First Coronavirus Response Act (FFCRA) credits for organizations with fewer than 500 employees. There are also employee retention credits for all sizes of organizations, subject to certain criteria, and a paid family leave credit for organizations of all sizes.
If you have the PPP loan and an employee takes the emergency leave, is it correct that you must take the credit and cannot use the PPP to pay this.
You can use their payroll in the PPP in lieu of the credit. If you request reimbursement then they can't be used in the PPP.
If we have active PPP applications that were in process prior to the funding running out, do the applications need to be resubmitted or are they going to stay in process?
They stay in process.
Will forgiveness on the PPP loans be on a cash basis only, cash and accrual, or both?
We are still awaiting guidance for how the cash vs accrual will work.
If a business takes PPP funds, but the funds are not used, can they take the employee retention credit?
Receipt of the PPP loan makes the employer ineligible for the employee retention credit. Please see our full summary.
If an employee leaves for another job and were in the PPP head count, is there an exception or is there still a penalty for the reduction of workforce?
The forgiveness is based on eligible spend during the 8 week period and your full-time equivalent count compared to a pre-COVID period. It is unclear whether there would be an exception for someone who quit. We would need clarification of this point in the forgiveness guidance, which is still pending.
If we want to pay 100% instead of 2/3rd for EFMLA, can we use PPP funds to pay the additional 1/3?
If you use the EFMLA reimbursement, the remaining unreimbursed part won't qualify for PPP forgiveness.
Are telework employees that have children at home, but can’t work due to closed schools or child care, eligible?
The Department of Labor has some great FAQs that address an intermittent schedule.
If our employees are currently under the $100k wages threshold, but we know they will be over the number by year end, do we need to reduce the amount paid by PPP now?
We are still waiting for how that will be factored into forgiveness.
If a married couple work together, does their payroll get added together related to the 100k wage limit?
The guidance states this is on a per individual basis.
Do 2019 retirement plan contributions made during the 8 week period in 2020 count as payroll costs?
We are still waiting on more forgiveness clarity.
Is there specific documentation required to be submitted to the bank or Small Business Administration for PPP forgiveness?
Each bank will be a little different, but in general, you will want to document your expenditures with 941s, payroll records, canceled checks, etc.
Will PPP loan forgiveness be treated as ordinary income by the businesses that receive forgiveness?
The forgiveness is not taxable.
Can you claim the employee retention credit for time in March, and then receive PPP funds in round two these coming weeks?
Probably not, but we first need to understand what is in the statute for round two of PPP.
Can you pay 2019 matching profit share contributions that would have been paid, but were not able to due to the shutdown, with PPP funds?
We still need further forgiveness guidance to clarify this.
What we talked about:
Rohen: Welcome back to our livestream series. Our goal today is to provide you with an update on liquidity options now that funding has run out for the PPP loans and the Economic Injury Disaster Loan relief. To start that conversation we have Omar Nashishibi with the Franklin Partnership. He is a Washington, D.C. based lobbyist and strategic consultant.
Omar, can you please give us an update on where things stand today with the PPP and EIDL programs?
Nashashibi: Thank you so much Jen. I know there's a lot of fast moving parts and thousands of questions rolling in. I'm currently lobbying with the White House and Congress on the 3P program and this legislation. We were never going to have a straight extension of the PPP program, but we do finally have a bill name, which means we’re close to the finish line. The bill is called the Paycheck Protection Program and Health Care Enhancement Act and as of April 28, 2020 they were scrubbing actual language which means they are prepping it for a Senate vote possibly at 4:00 ET.
Here's what we do know based on conversations we've have with Capitol hill staff and others around Washington, DC:
- The total bill is set at $484 billion
- $321 billion for the PPP program, with $60 billion set asides for underserved businesses
- Set aside amount for banks that are $10 to 50 billion in assets
- Another set aside for banks that are under $10 billion in assets
The challenge is there are still 800,000 pending applications that are just sitting in limbo. That is in addition to the 1.66 million loans that were already approved last week. We're also hearing they don't think this next round of $300 billion is going to be enough to get to June 30th. That means that Congress will most likely have to come back and re-fund the 3P program one more time.
Regarding the Economic Injury Disaster Loan program, we're hearing that number is at $60 billion. They are going to allow those funds to be leveraged to meet existing demand, but the program had $383 billion in requests as of last week as well – so, how far is that $60 billion for the EIDL going to go. There has been some pressure on the SBA to at least start approved pending authorization.
Separately, the Democrats have pushed for $75 billion for hospitals, with a significant portion set aside to help those in rural areas, along with $25 billion for testing.
As for timing, the Senate is going to be in a pro forma session this afternoon at 4:00 p.m. and unless a senator stands up to object, then they will move forward under what we call unanimous consent. The real challenge is going to be the House of Representatives, as the 435 members are scattered and they need 215 for a quorum. We are hearing that they are scheduled to gather on the floor of the house at 10:00 a.m. on Thursday and that's where they will start proceedings. We are hearing there is going to be one member of Congress who does object, which means they cannot move forward under unanimous consent or a voice vote; they will have to hold a recorded vote, which we can expect early Thursday afternoon.
Separately the main street lending program should be up and running within a week. This program is separate from the EIDL in the PPP program and has been put out there by the Federal Reserve.
Rohen: Thank you, Omar. Based on this, we would like to bring in some other guests to walk through some liquidity options during the lending pause. Chastity Wilson is the managing principal of our National Tax Office and Scott Hess is a principal with our BizOps, Accounting and Finance team and also leads our outsourced payroll practice.
Welcome, everyone. To kick us off, let’s spend a few minutes on a quick refresh of the key provisions that came from both the FFCRA related to the Paid Sick Leave and EFMLA. Chastity, can you please provide us with an overview of the employer requirements?
Wilson: I think it'd be helpful to go through the criteria for when an employee is eligible for either paid sick leave or emergency FMLA. There are six criteria, but that's a little bit of a misnomer. Right now it's really five criteria, which I'll explain.
The first bucket to understand are those employees that are directly impacted by COVID-19. The criteria in this bucket are:
- Employee has been subject to a federal, state or local quarantine or isolation order. As we know most states have some kind of shelter-in-place order. It was initially thought this would cover a lot of employees. The Department of Labor has come out with FAQs, which has really narrowed that impact of this criteria category. It is only going to apply where the employer actually has work, but the employee can't report to work or telework, which is a very narrow category.
- Employee that is subject to isolation or quarantine order by a health care provider.
- Employee has symptoms of COVID-19 and is seeking a medical diagnosis.
The second bucket is those who are helping somebody with COVID-19. The criteria in this bucket are:
- Employee helping an individual that is subject to a quarantine order or has been diagnosed with COVID-19.
- Employee is taking care of a child because a day care or school is closed. Again the employee can't have the ability to telework during that period.
There is a sixth category, but it's very broad and it basically says any other symptoms that are determined by the Health and Human Services Department, but this hasn’t yet occurred, so we really have five criteria.
Rohen: Thanks for the reminders of the requirements. For those employers who have been required to pay, could you please walk us through the tax credits related to those?
Hess: Certainly Jen, the credits can be tricky because they vary based on the type of leave. For qualified sick leave, the credit is capped at $511 per day if for the employee’s own care and $200 per day for the care of another individual. The credit for paid family leave is also $200 per day with a maximum credit of $10,000 through the end of the year. The credit can be increased by the employer portion of the Medicare taxes and health plan expenses allocable to qualified leave wages.
Rohen: What are the mechanics to take the credits?
Hess: The credits are available as an immediate offset against employment tax deposits. The actual mechanics will vary based on the size of those credits. If, for example, your credits for a pay period are $5k and your total tax deposit otherwise due is $8k you simply reduce the deposit by credit amount and remit just $3k to the IRS. If the credit were to exceed the deposit, you would forgo the deposit altogether and request an accelerated refund on Form 7200. So if in the previous example the credits were $10k, you would forgo payment and file for a $2k refund.
Rohen: We’ll talk about the specifics of form 7200 after we cover a little more ground with the employee retention credit, but first, I’d like to ask about the record keeping requirements for the Paid Sick Leave and the EFMLA.
Hess: It’s important to remember that is an employee initiated leave, so you need to get a written request of FFCRA leave from the employee that includes a statement of the COVID-19 related reason they are unable to work and the details surrounding any quarantine for sick leave and school or child care closings for family leave. Once payments begin, you will need to maintain documentation of the paid leave itself as well as documentation of any related health plan expenses. Most payroll companies have updated their software for FFCRA tracking, but you have to make sure to notify them of any qualifying payments you are making.
Rohen: Thanks, Scott – I know a lot of our clients have been asking about what they need to support these payments and what they need to retain, so I think that information is going to be extremely helpful.
Now I’d like to turn to the other payroll tax credit that was created as a result of the CARES Act – the employee retention credit. Chastity, can you please summarize that credit?
Wilson: The provision allows eligible employers carrying on a trade or business in 2020 a refundable tax credit against Social Security taxes imposed under section 3111(a) of the Internal Revenue Code (the “Code”) or Railroad Retirement Tax Act taxes imposed under section 3221(a) of the Code. Eligible employers include employers whose operations were fully or partially suspended due to a COVID-19 government-mandated shut-down order, or employers whose gross receipts declined by greater than 50 percent when compared to the corresponding calendar quarter of the prior year.
The refundable credit is applicable for all wages paid between March 12, 2020, and before January 1, 2021. The credit is computed on a calendar-quarter basis and equals 50 percent of qualified wages up to $10,000 paid to each employee or $5,000 in actual credit. Eligibility for the credit begins with the first 2020 calendar quarter in which the employer’s gross receipts declined by greater than 50 percent of the corresponding calendar quarter of the prior year, and ends with the calendar quarter following the calendar quarter in which the gross receipts exceed 80 percent of the corresponding calendar quarter of the prior year. For purposes of computing the credit, qualified wages paid to an employee during the relevant period may not exceed an amount that would have been paid to such an employee within the preceding 30 days.
Rohen: I know one question that we keep hearing is whether this credit amount is by quarter or for the total period. Can you take a second to address that?
Wilson: It’s a maximum $5000 credit per employee for the remainder of the 2020 year.
Rohen: So, this is also a payroll tax credit that you’d take on the form 7200 that we mentioned earlier. What are the documentation requirements for all of this?
Wilson: The requirements include:
- Documentation to show how you figured the amount of qualified sick and family leave wages eligible for the credit.
- Documentation to show how you figured the amount of the employee retention credit.
- Documentation to show how you figured the amount of qualified health plan expenses that you allocated to wages.
- Documentation to show how you determined that the employees were qualified to receive sick and family leave wages, including any additional information set out in Frequently Asked Questions or other guidance on IRS.gov.
- Documentation to show your eligibility for the employee retention credit based on suspension of operations or a significant decline in gross receipts.
- Copies of completed Form(s) 7200 you filed with the IRS.
Rohen: Can you please touch on how this works for someone who is in receipt of the PPP Loans?
Wilson: An employer who has received PPP loans will not be able to take the credit for any payroll amounts funded by the loans.
Rohen: Thanks Chasity, I know the IRS recently issued guidance on the interaction between PPP loan forgiveness and the ability to take advantage of the payroll tax deferrals available under the CARES Act.
Hess: Prior to passage of the CARES Act there was talk of a payroll tax holiday, which would have been a temporary elimination of the tax. Instead we got a deferral, which amounts to an interest free loan for employers looking to conserve cash. The deferral allows employers of all shapes and sizes to postpone payment of the employer portion of social security taxes on deposits otherwise due from March 27th through the end of the year, with 50% of the deferred amounts due at the end of 2021 and 2022. The only limitation is that the deferral is not available to employers that have had a debt forgiven under the PPP loan program. However, recent IRS guidance confirmed that those employers could defer up until the point in time they receive a notice of forgiveness.
Rohen: That’s a great summary of the benefits in CARES and FFCRA. I’d like to turn to some existing income tax credits that apply across the board for larger employers and for those who are planning to hire employees again as we roll out of the COVID crisis. Chastity, could you please start with the Work Opportunity Tax Credit (or WOTC)?
Wilson: This is an important credit because it offsets income tax liability. The credit is for employers who hire people who fall into certain targeted groups, like food stamp recipients, temporary assistance for needy family recipients, and people who are in a period of unemployment that’s lasted 27 weeks at the time they come to work for the employer. Although it won’t apply to rehires who have worked for the organization in the past, it will apply to all new hires to the organization and will be in effect through the end of 2020. We expect to see this credit renewed and/or made permanent in future years.
Rohen: Why is it important for employers to be thinking about this now?
Wilson: There’s a process for an employer to claim this credit that requires some questions to be asked and forms to be submitted within 28 days of the employee’s start date. This credit is great because it does not depend on the size of the organization in order for an employer to be eligible.
Rohen: Are there other credits that employers should be considering?
Wilson: Employer Credit for Paid Family and Medical Leave
Rohen: Thanks so much for this helpful information on some liquidity options during the lending pause. We will continue to provide resources and more information on our COVID-19 hub at claconnect.com. We will also be back on Thursday with updates to the Paycheck Protection Program and where things stand as of now.. We look forward to seeing you on Thursday, and in the meantime please feel free to continue to reach out to us on our website or using the links in the dialogue box below. Please stay safe and healthy, and have a great afternoon.