Navigating Overlapping and Inter-related Provisions of the Current COVID-19 Tax Relief
April 7, 2020 by
March, from a tax advisor perspective, was exhausting. There was a constant deluge of information on existing, new, and pending legislation. While many of these recent laws encourage businesses to press pause and taper the spread of COVID-19, they also interact in ways to prevent double-dipping on relief. This article distills the deluge of legislation and information to help businesses seek tailored relief and maximize long-term success.
COVID-19 related tax events through April 3, 2020. The following lists the most prominent COVID-19 related tax events:
- March 6, 2020 – Coronavirus Preparedness and Response Supplemental Appropriations Act becomes law.
- March 13, 2020 – President declares national emergency.
- March 18, 2020 – Families First Coronavirus Response Act (FFCRA) becomes law.
- March 18, 2020 – IRS Notice 2020-17 extends payment deadline for 2019 tax year.
- March 20, 2020 – IRS Notice 2020-18 expands extension in IRS Notice 2020-17 to include filing extension and other changes.
- March 24, 2020 – IRS issues non-binding FAQs regarding extensions in IRS Notice 2020-18.
- March 25, 2020 – IRS issues IRS 2020-59 implementing the “People First Initiative” suspending many compliance programs in response to COVID-19.
- March 27, 2020 – Coronavirus Aid, Relief, and Economic Security Act (CARES Act) becomes law.
- March 31, 2020 – IRS issues Notice 2020-22 providing relief from penalty for failure to deposit employment taxes.
- March 31, 2020 – IRS issues more non-binding FAQs related to the Employee Retention Credit under the CARES Act.
- April 2, 2020 – IRS warns taxpayers about Coronavirus-related scams related to the economic impact payments.
- April 3, 2020 – Applicable Affiliation Rules for the Paycheck Protection Program are released.
Unfortunately, April will continue to be busy as further guidance is released regarding the CARES Act and the Paycheck Protection Program (PPP). The IRS, however, was already backlogged with overdue guidance on the large changes made by the Tax Cuts and Jobs Act (TCJA), wholesale changes on auditing partnerships under the Bipartisan Budget Act (BBA), and other provisions on enforcement priorities. Also, with continued closures and many IRS employees working remotely, some for the first time, it is unclear how long this guidance will take.
COVID-19 Relief: One size does not fit all. The flood of COVID-19 legislation has many moving parts, and one size doesn’t fit all. From business loans, tax credits, and payroll tax relief, taxpayers must evaluate the avenues of relief quickly and carefully—and without much IRS guidance—to determine what will help them keep their businesses alive long enough for the pandemic to end. Right now, the COVID-19 legislation is like a sophisticated choose-your-own adventure book with very real consequences that should not be taken lightly: choosing one type of tax relief can implicate other types of relief and, in some cases, disqualify taxpayers for other relief. The following sections summarize various tax related relief implemented for COVID-19 and explains how they interrelate with other provisions.
Families First Coronavirus Response Act (FFCRA)
An earlier Brown Fox article explained the paid leave obligations of the FFCRA, but subsequent legislation must now be considered. The FFCRA provides employers with refundable tax credits to offset the cost of paying sick and family medical leave for employees who cannot work because of COVID-19. The FFCRA applies to wages paid for April 1, 2020 through December 31, 2020. Employers can benefit immediately by reducing their federal employment tax deposits by the amount of the credit. If federal employment taxes are insufficient to cover the amount of the credit, they can request an advanced payment using IRS Form 7200. However, the wages used to qualify under FFCRA cannot also be used to qualify for the Employee Retention Credit (ERC) implemented under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Employee Retention Credit (ERC)
The recently passed CARES Act included the ERC for employers subject to closure due to COVID 19. The ERC is another refundable payroll tax credit of up to $5,000 for each employee’s wages paid from March 13, 2020 through December 31, 2020. In general, an employer qualifies if a governmental shut-down order fully or partially suspended its operations during the COVID-19 crisis or if its gross receipts declined by more than 50 percent compared to the same quarter in 2019. What qualifies as a governmental shut-down order remains unclear and is further complicated because each state has a different version. Also, many businesses may not yet have quarterly information to compare to the first quarter of 2019. This credit, however, might be especially useful for employers with lower salaried employees because it is calculated per employee, as compared with the Payroll Protection Program (PPP). Also, employers receiving SBA loans under the PPP are not eligible for the ERC so they must choose one of these programs—not both.
Payroll Tax Postponement
In an attempt to provide liquidity, the CARES Act also allows for a postponement of the employer portion (6.2%) social security withholding taxes for payrolls starting on March 27, 2020. All employee withholding taxes are not postponed so further guidance is necessary on how to account for just the postponed portion. However, this provision could provide a potentially large amount of funds for use by businesses immediately. Half of the postponed payroll would be due at the end of 2021 and the remaining half at the end of 2022. However, employers cannot take advantage of the postponement if they request forgiveness of loans received under the Payroll Protection Program (PPP). Therefore, if an employer intends to apply for the PPP, and seek forgiveness of those loans, they should probably not participate in the postponement of the employer portion of payroll taxes. Potentially the timing could allow for temporary deferral until participation and forgiveness is provided. However, there is at least a potential risk that the IRS may seek retroactive penalties and interest on this amount.
Paycheck Protection Program (PPP) Forgivable Loans
The PPP modifies and expands the federally guaranteed Small Business Administration (SBA) loans. Loans are available up to $10 million and can be partially or completely forgiven if spent on payroll costs, interest on mortgage obligations, rent, and utilities. A major consideration with a PPP loan is that the forgivable amount can be reduced if an employer reduces the number of employees or the wages paid to employees. The official applications for these loans were scheduled to be available on April 3rd, but some banks couldn’t meet that deadline. For the banks that did meet the deadline, many of them only offered PPP loans to existing customers. Many taxpayers have expressed frustration with the knowledge of the participating banks, different terms, and limited availability for new borrowers. However, regardless of the bumpy start, many taxpayers appear to be taking advantage of the program and finding a lender they can use to borrow the necessary funds. It is only available to small businesses and non-profit organizations (i.e. less than 500 employees or, if applicable, the SBA’s small business size standard based on NAICS industry codes), with an exception for certain hospitality businesses on a per-location basis.
Calculating “Payroll Costs” for a PPP Loan
To calculate how much an employer is eligible for in a forgivable PPP loan, multiply the average monthly “payroll costs” (outlined below) incurred during the 1-year period before the loan is made by 2.5. If the SBA considers an employer to be a seasonal employer, monthly payroll costs would be the average the 12-week period in 2019: February 15 (or March 1 at the employer’s election) until June 30, 2019.
Included in Payroll Costs. A PPP loan amount is based on the business’s average monthly payroll costs incurred during the 1-year period before the loan is made. For businesses with employees, payroll costs shall include the sum of any compensation payments to employees that is a:
- salary, wage, commission, or similar compensation;
- payment of cash tip or equivalent;
- payment for vacation, parental, family, medical, or sick leave;
- allowance for dismissal or separation;
- payment required for the provisions of group health care benefits, including insurance premiums;
- payment of any retirement benefit; or
- payment of State or local tax assessed on the compensation of employees.
With proper documentation, independent contractors and sole proprietors may also seek relief through a PPP loan. In that case, payroll costs include the sum of similar payments of any compensation to or income of a sole proprietor or independent contractor that does not to exceed $100,000 in 1 year, as prorated for the covered period (which is February 15, 2020 and ending on June 30, 2020). The interaction of employer payments to independent contractors isn’t clear and further guidance is needed from the IRS.
Excluded from payroll costs. Payroll costs do not include:
- the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
- taxes imposed or withheld during the covered period pursuant to FICA, the Railroad Retirement Act, or the Child Tax Credit (26 U.S.C. §§ 21, 22, 24);
- any compensation of an employee whose principal place of residence is outside of the United States;
- qualified sick leave wages, for which § 7001 of the FFCRA allows a credit; and
- qualified family leave wages, for which § 7003 of the FFCRA allows a credit.
The average monthly payroll costs, as calculated above, are then multiplied by 2.5 to determine what PPP loan amount an employer is eligible for—up to the statutory $10M cap. As indicated above, employers must choose between PPP and the Employee Retention Credit. Also, payroll tax postponement provisions have consequences on forgivability of loans received under PPP. Both should be considered when deciding whether or not to apply for PPP.
Additional CARES Act Relief
Beyond the Employee Retention Credit (ERC), payroll postponement, and Payroll Protection Program (PPP) there are other provisions in the law that can help businesses cope with COVID-19. There are loans, guarantees and other investments that apply to small, medium, and large businesses. These include billions for business for passenger and cargo air carriers, businesses critical to maintain national security, and other businesses not otherwise receiving adequate economic relief through other loans or guarantees.
The CARES Act also changes the elimination of carrying back Net Operating Losses (NOLs) done by the Tax Cuts and Jobs Act (TCJA). Under the TCJA, NOLs could only be carried forward after December 31, 2017. The CARES Act allows taxpayers with NOLs arising in 2018, 2019, and 2020 to carryback those losses to the five preceding taxable years. Taxpayers should evaluate their tax positions to see if any unclaimed losses would allow them to amend returns and claim immediate refunds of amounts paid. Corporations can apply for a quick refund using IRS Form 1139, and individuals, estates, and trusts can use IRS Form 1045. Because of the new audit rules, partnerships may need to file an Administrative Adjustment Request (AAR) using IRS Form 8082 unless the IRS provides guidance on an alternative procedure. For example, the IRS allowed partnerships to file superseding 2018 tax returns to elect out of the new audit rules as part of the transition to the new program. See Rev. Proc. 2019-32. A similar superseding return program may work for these amendments as well.
Also, the CARES Act increases the limitation on deductible business interest from 30% to 50% of the taxpayer’s adjusted taxable income (ATI) and allows taxpayers to elect to use 2019 ATI amounts when computing the deduction limitation for 2020. Partnerships make this election at the partnership level, but the increase is only applicable to the 2020 tax year.
Given that all of this legislation is new, and Treasury, IRS, SBA, and the participating banks are all drafting implementation documents, there most certainly will be updates to consider. As updates are published, we will try and post them in this article. If you have questions about your specific situation, please reach out to a Brown Fox attorney – our contact information is listed below.