Many businesses are asking questions about new SBA loans available under the Paycheck Protection Program (PPP). Oftentimes businesses are not aware of other new resources available in the form of refundable advance tax credits — reimbursing the cost of employee wages paid in connection with COVID-19. In many cases, the credits available can exceed the tax liability owed, and the credits may be available for refund before an employer’s tax return is even due.
Paid Leave Credits
The Families First Coronavirus Response Act (FFCRA) requires certain employers to provide paid leave to employees impacted by the COVID-19 outbreak. To offset the burden associated with the new paid leave requirements, the FFCRA creates two new payroll tax credits for affected employers. The credit equals the amount of paid leave required under the FFCRA (either $511 per day or $200 per day, as applicable), plus health care costs and the employer’s share of Medicare taxes allocable to those wages. An employer can take the Paid Leave Credits and apply for an SBA loan under the PPP, but the employer cannot include wages used for the Paid Leave Credits for purposes of calculating the PPP loan amount.
Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act) creates an additional Employee Retention Tax Credit. The Employee Retention Credit equals 50% of qualified wages paid to employees from March 13, 2020 through December 31, 2020. The credit is available to employers whose: (1) operations were fully or partially suspended due to a COVID-19-related shut-down order; or, (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
The credit is based on “qualified wages” paid to the employee. For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are not providing services due to a COVID-19-related suspension or shut-down. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order (subject to the reduction in gross receipts requirement). The credit is available on up to $10,000 of qualified wages per employee, including health benefits. This means a qualified employer will receive a credit of up to $5,000 per employee. The Employee Retention Credit is not available for employers who receive a PPP loan, and it is reduced for employers who receive the Paid Leave Credits, described above.
Claiming the Credits
Employers can claim the Paid Leave Credits or the Employee Retention Credit a few different ways. The credits can reduce employment tax deposits or amounts due with an employer’s quarterly employment tax return, and employers may even be eligible for an advance refund of credits. We anticipate additional guidance from the IRS, but we recommend that interested employers follow these steps to take advantage of these credits:
- Step 1: Reduce payroll tax estimates for the quarter by the anticipated credit amount.
- Step 2: Seek advance credits if payroll tax estimates are less than the anticipated credit amount.
- Step 3: Reconcile deposits, credits, and advance payments on quarterly payroll tax returns.
The Paid Leave Credits and Employee Retention Credit provide an additional funding mechanism for employers thinking about how to cover employee payroll expenses during this time of uncertainty. If you have questions about these credits, including how they compare or fit with options under the PPP, please reach out to BrownWinick attorneys Cindy Lande, Chris Nuss, or BrownWinick’s taxation team. There are many nuances to the different credit programs, and the IRS is updating and modifying its procedures relating to the credits on an almost daily basis, so we encourage you to talk with an expert about the details of the credit programs and whether the credits are right for your business.
COVID-19 Resource Page
See BrownWinick’s COVID-19 Resource Page for guidance on the latest state and federal updates related to the impact of COVID-19.