Additional Funding Available under Updated CARES Act and the Interaction between COVID19-Related Tax Credits and Loan Programs

Originally published: April 28, 2020

Authors:  Attorneys Eric Klemm and Joseph A. Camilli

 

  1. Summary of the Paycheck Protection Program and Health Care Enhancement Act

President Trump signed the “Paycheck Protection Program and Health Care Enhancement Act” on April 24, 2020, which primarily increased the funds available for the Paycheck Protection Program (PPP) loans, adding over $300 billion to the Paycheck Protection Program funding and $50 billion for Economic Injury Disaster Loans, and $10 billion for the emergency grants under the Economic Injury Disaster Loan (EIDL) program.  In total, over $360 billion in additional funds has been appropriated to help small businesses.

At least $30 billion of the new PPP resources are set aside for small banks and credit unions, and an additional $30 billion for community financial institutions and minority depository institutions.  In addition, the bill has expanded eligibility for the PPP loans, and now “agricultural enterprises” such as farms, ranches, aquaculture or other farming related enterprises are eligible for relief.

The resources made available under this enhancement act came online as of April 27, 2020.  As such, now is an excellent opportunity to work with your legal counsel, accountants, and banks to determine whether pursuing these funds is the right fit for your business needs to help sustain your business through these difficult times.

  1. Interplay between Loan Programs and New Tax Credits

The Families First Coronavirus Response Act (FFCRA) was passed earlier this year and requires certain employers to provide paid leave to workers who are unable to work (either in person or remotely) due to various COVID-19-related circumstances.  However, this paid-leave mandate is offset against newly created payroll tax credits that employers can obtain in order to  defer the cost during this time of crisis.  The Coronavirus Aid, Relief, and Economic Security (CARES) Act also provides for tax credits for employers who are experiencing a dramatic downturn in business yet who are willing to retain and keep their employees on payroll.  The availability and use of these tax credits is limited by an employer’s decision to utilize PPP loans, so a comprehensive understanding of how these credits and PPP loans relate is extremely important.

Tax Credits

The three types of available payroll tax credits correspond to:

  1. FFCRA’s Paid Sick Leave: Employers with fewer than 500 employees are required to provide all employees (regardless of the length of time employed) with up to two weeks of paid sick leave at the following rates:
    1. (Category A) The employee’s regular rate of pay if the employee is:
      1. Subject to a quarantine or isolation order;
      2. advised by a medical provider to self-quarantine, or
  • experiencing symptoms of COVID-19 and seeking a diagnosis;
  1. (Category B) 2/3 the employee’s regular rate of pay if the employee:
    1. Needs leave to care for a family member who is subject to isolation or self-quarantine; or
    2. is caring for a his/her child because the child’s school or child care provider is closed or unavailable.

The paid sick leave payroll obligation is capped at $5,110 in total for Category A leave and $2,000 for Category B leave.  The FFCRA provides for a payroll tax credit of 100% of the paid sick leave and if the calculated credit exceeds the employer’s payroll tax obligation, the tax credit becomes a cash refund.  Both the credit and refund can be claimed using IRS Forms 941 and/or 7200.

  1. FFCRA’s Expanded Family Medical Leave: Employers with fewer than 500 employees must provide employees who have been on the job for at least 30 days with up to 12 weeks of job-protected family leave if the employees need leave in order to care for a child of the employee because the child’s school or child care provider is closed or unavailable due to coronavirus.

The first two weeks of required family leave may be unpaid but employers can (and likely must) utilize the FFCRA’s paid sick leave benefits to compensate the employee during those two weeks.  After those initial two weeks, the next 10 weeks of leave must be paid at 2/3 the employee’s regular rate of pay up to a limit of $200 per day and $10,000 total per employee.  The FFCRA provides for a payroll tax credit of 100% of the paid family leave and if the calculated credit exceeds the employer’s payroll tax obligation, the tax credit becomes a cash refund.  Both the credit and refund can be claimed using IRS Forms 941 and/or 7200.

Small businesses with fewer than 50 employees may be exempt if providing the leave would jeopardize the viability of the business as a going concern.  Determining what conditions exist to prove such jeopardy is not entirely clear, but employers should gather as much financial and contract documentation to support this assertion as possible.

  1. The CARES Act provides a payroll tax credit for 50% of wages paid by eligible employers to employees from March 13 through December 31, 2020. An employer is eligible for the tax credit if it:
    1. Had operations fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings; or
    2. experienced a greater than 50% reduction in quarterly gross receipts as compared to the same quarter in 2019. Employers with less than 100 employees on average in 2019 may take a 50% credit for all wages paid to all employees between March 13 and December 31 of 2020.  Employers with more than 100 employees in 2019 are eligible to receive a 50% credit for only those wages paid to employees who are prevented from working due to the employer’s suspension or reduction in operations.

How the Tax Credits Interact with PPP Loans

An employer is generally eligible for PPP loans under the CARES Act even if the employer is also receiving sick/family leave tax credits under FFCRA.  However, employers are not permitted to include the amount of mandatory sick leave and family medical leave payments required under the FFCRA when calculating the amount of the PPP loan.  Moreover, if PPP loan recipients desire their PPP loan to be forgiven (as most likely do), the PPP loan proceeds may not be used to pay for such mandated leave.  Using PPP loans for these mandated and reimbursable leave expenses (via the FFCRA’s tax credits) would amount to double dipping, so although PPP loan proceeds may be used for this leave, such payroll expenses may not be included in “payroll” for purposes of calculating the forgivability of the PPP loan.

Thus, an employer may not take an employee retention tax credit for required sick/family leave wages under FFCRA for which the employer also receives a payroll tax credit.

As for employee retention tax credits, the situation is much more murky.  It appears from the CARES Act that employers receiving any PPP loan will be ineligible to utilize the employee retention tax credit, and if they attempt to, the Treasury (ostensibly through the IRS) will somehow recoup the claimed tax credits.  However, this appears to ignore the unique nature of both programs.  In order to be forgivable, at least 75% the PPP loans must be used on payroll within an 8 week period following the employer’s receipt of those funds.  However, the 8 weeks will come and go in the blink of an eye.  The employee retention tax credit, however, is applicable through the end of the calendar year 2020 and because it can reimburse up to 50% of an employees’ wages (up to a certain level), depending on an employer’s unique situation, the retention tax credit may be more valuable than the PPP loan over time.

If it was Congress’s goal to maximize employers’ abilities to retain their workforce, one would think that these programs could be used together over time, so long as employers would refrain from double-dipping over a similar time period.  Therefore, it would seem reasonable that further guidance from the IRS/Treasury will be forthcoming on how these two benefit programs can coexist so as.  Nonetheless, for the time being, employers must carefully weigh its decisions when accepting PPP loans versus pursuing employee retention tax credits.

 

This article was co-authored by Attorneys Eric Klemm and Joe Camilli.  Attorney Eric Klemm is a graduate of the University of Wisconsin’s School of Law and practices as part of Neider & Boucher, S.C.’s business team.  Attorney Joe Camilli is a graduate of the Hamline University School of Law and practices business and employment law as part of Neider & Boucher, S.C.’s business team.  Attorney Camilli was recognized as a 2019 Up and Coming Lawyer by the Wisconsin Law Journal.

 

The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.

 

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