Payroll Tax Deferral Does Not Disqualify Taxpayers From Applying For or Utilizing a PPP Loan
April 15, 2020
While the Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided expansive aid to taxpayers and employers across the country, it has generated an equal amount of uncertainty as to how all of the new programs interact. Over the past several weeks, the continuous release of new guidance from the IRS has seemed to only add to the confusion by creating more and more limitations. However, the most recent guidance rolls back some of those limitations, providing good news to taxpayers hoping to utilize the employer payroll tax deferral provision while also applying for the Paycheck Protection Program (PPP).
The employer payroll tax deferral provision and the PPP loan are two new relief measures created by the CARES Act aiming to help small businesses access much-needed cash flow to stay open and continue paying employees. The PPP established a potentially forgivable loan program operated in coordination with the Small Business Administration (SBA) that allows businesses to borrow funds to assist with maintaining payroll as well as other costs like rent or mortgage payments. Additionally, the CARES Act introduced a provision for employer payroll deferral, which defers the payment of the employer portion of Social Security taxes due from March 27, 2020, through Dec. 31, 2020.
Initially, it was unclear whether taxpayers could take advantage of both programs simultaneously and what the interaction would be between these two programs. However, the IRS recently issued a clarifying statement through a new addition to the ever-evolving FAQs page on the IRS website, which currently contains 11 FAQs and will continue to be updated to address future questions. Within the FAQs, the IRS clarified that employers who apply for a PPP loan can continue to defer payroll taxes until the time that the loan is ultimately forgiven. Use of the deferral option will not disqualify taxpayers from applying for or utilizing a PPP loan, nor will the application or use of a PPP loan prevent taxpayers from deferring payroll taxes, as long as the business stops deferring at the time the PPP loan is forgiven.
The guidance in the FAQs specifically states that employers may defer their payroll taxes up to the date of forgiveness of the PPP loan, and then employers may continue to not pay that deferral until the repayment dates listed in the CARES Act (half by Dec. 31, 2021, and the balance by Dec. 31, 2022). The only limit is that the deferral of additional payroll taxes must stop as of the date of loan forgiveness. Because forgiveness under the PPP will be determined through a formula, it is expected that not all taxpayers will obtain forgiveness of their entire loan amounts, but the IRS has not yet indicated exactly how much loan forgiveness will be required before the payroll tax deferral will no longer be applicable.
To help understand how these rules affect loans and payroll taxes in a real-life scenario, consider this example:
An employer applies for a PPP loan and receives funds on April 30, allowing them to use the funds to make payroll for May and June. The employer then provides documentation to their bank to get part of the loan forgiven and receives notification from the bank that the PPP loan will be forgiven on Sept. 30. Based on the date that the loan was received and ultimately forgiven, the new guidance from the IRS would allow the employer to defer all of their FICA tax from May 1 until Sept. 30.
While this is purely a hypothetical scenario and no one can be certain when employers will receive PPP loan forgiveness, it illustrates how the PPP loan and the payroll tax deferral provision can interoperate up until the point of loan forgiveness. Employers should inform their payroll providers directly on when to start and stop deferring payroll taxes, and it will be imperative that the deferral stops at the time the employer receives the loan forgiveness. It is also important to remember that the PPP loan is needs-based, and any recipient (regardless of whether they use the deferral option) should be prepared to provide documentation to support their claim to government authorities at some point.
Based on the most recent guidance, it is now clear that taxpayers can utilize the employer payroll tax deferral provision while waiting for an answer to a PPP application. This will be a huge benefit for employers that desperately need more cash flow to maintain employees and keep their businesses open. If you are a business owner that thinks either (or both) of these new relief provisions may be helpful, connect with an Aprio expert to help calculate and maximize your potential benefit. Aprio’s experts have vast experience with calculating and claiming payroll tax credits and have been on the forefront of helping clients maximize their PPP loan benefits.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Partner At Aprio Charles is a partner in Aprio’s Technology & Biosciences and International Services groups. He has more than 25 years of experience providing tax planning, tax compliance and strategic analysis to his clients. Charles is adept at serving the needs of startups and other emerging companies. He has been an entrepreneur himself and understands firsthand the needs and challenges growing companies face.