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INSIGHT: Interactions Among Loan, Various Tax Credit/Deferral Provisions

June 2, 2020, 1:01 PM

There has been a tremendous amount of guidance published by Treasury and the SBA on the paycheck protection program (PPP), and more is expected. The IRS is not far behind, publishing substantial amounts of guidance on the employee retention tax credit (ERTC) (Section 2301 of the CARES Act), the employer payroll tax deferral (EPTD) provision (Section 2302 of the CARES Act), and the refundable tax credits for the qualified paid sick/family leave (QPS/FL) provisions (Sections 7001 and 7003 of Families First Coronavirus Response Act), among other things.

There is a lot of uncertainty among taxpayers about which option provides the largest benefit. For most taxpayers, the PPP will be the best option because it provides forgiveness for eight weeks of payroll costs and certain overhead expenses. The ERTC is the next best option, and the only option for many taxpayers either because they did not meet the relevant employee or size standard for a PPP loan, or because they felt they could not make the key certification—that current economic uncertainty makes the loan necessary to support the ongoing operations of the business. See SBA FAQs #31, 37, 39, and 43. In either case, taxpayers can avail themselves of the EPTD and QPS/FL provisions independent of whether they obtain a PPP loan or claim the ERTC, to the extent they qualify.

The interaction among these various provisions, and others, is difficult to keep straight. Below is a summary of the interactions among the various provisions.

Employee Retention Tax Credit

1. The ERTC is not available if an employer obtained a PPP loan. Section 2301(j) of the CARES Act; IRS FAQ #78. However, the ERTC is available if an employer obtained a PPP loan and repaid it by May 18, 2020. SBA FAQ #45; SBA FAQ #47; IRS FAQ #45; IRS FAQ #79.

2. The ERTC is unrelated to loan forgiveness under a PPP loan because once a PPP loan is obtained, the employer no longer qualifies for the ERTC, subject to the repayment exception above. IRS FAQ #81.

3. If multiple entities are treated under the aggregation rules as a single employer for purposes of the ERTC, then the ERTC is not available to any member of the group if any member obtained a PPP loan, subject to the repayment exception above. IRS FAQ #80; IRS FAQ #25.

4. The ERTC is available if the employer receives a credit under tax code Section 45S (the paid family and medical leave credit) only if the two credits do not apply to the same wage payments. IRS FAQ #82. Note the credit under tax code Section 45S is different than the refundable tax credit under the QPS/FL provisions.

5. The ERTC is available if an employer receives credits under tax code Section 51 (the Work Opportunity Tax Credit) only if the two credits do not apply to the same employee for the same period of time. IRS FAQ #83.

Employer Payroll Tax Deferral

6. The EPTD provision is not dependent on whether a PPP loan is obtained; rather; it applies up to the date the lender issues a favorable decision to forgive all or part of a PPP loan. Section 2302(a)(3) of the CARES Act; IRS FAQ #4. If no forgiveness is obtained, then the EPTD can continue through the end of 2020.

7. After the date the lender issues a favorable decision on loan forgiveness, an employer is no longer eligible to defer the deposit and payment of the employer’s share of Social Security tax; however, deferrals up to and including such date continue to be deferred up to the repayment dates listed in the statute—half by Dec. 31, 2021, and the balance by Dec. 31, 2022. IRS FAQ #4.

8. The EPTD provision applies before a determination of eligibility under the ERTC or the QPS/FL credit, which means that an employer can claim the EPTD prior to determining whether it is entitled to credits under the other programs, and prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits. IRS FAQ #5 & FAQ #6.

Qualified Paid Sick/Family Leave

9. The QPS/FL credits are available if an employer also receives the ERTC. IRS FAQ #18.

10. The QPS/FL credits are available if an employer also receives a PPP loan (i.e., a Small Business Interruption Loan under the CARES Act). IRS FAQ #19.

11. If an employer claims credits for wages paid under the QPS/FL provisions, then it cannot include those same wages in “payroll costs” for purposes of determining the maximum loan amount or the amount of loan forgiveness under a PPP loan. Section 1102(a)(2) of the CARES Act.

12. Employers cannot claim QPS/FL credits and credits under tax code Section 45S (the paid family and medical leave credit) for the same wages, but they may be able to take a credit under tax code Section 45S with respect to any additional wages paid. IRS FAQ #52.

13. An employee can receive both qualified sick leave wages and qualified family leave wages, but at different times. IRS FAQ #59.

This article is current as of May 28, 2020.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Daniel Mayo is a principal with Withum and has more than 20 years of professional tax experience as well as experience in federal, international and financial products taxation. He is a member of Withum’s National Tax Services Group and oversees the U.S. Federal income tax research, planning and review functions. He is experienced in mergers and acquisitions, capital markets and cross-border transactions.

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