For several weeks now, the news cycle concerning the COVID-19 bailouts has been dominated by controversies surrounding the Paycheck Protection Program and the loans available to “small businesses.” The first round of funding ran out in under two weeks with only approximately 5% of the nation’s small businesses obtaining funds. Companies ranging from Shake Shack, to prominent investment firms, to the Los Angeles Lakers took advantage of this $350 billion round of funding, and many of these businesses were shamed into giving the money back. Now, a second, smaller, round of funding is underway. It stands to reason that these funds will also be quickly depleted, and many small businesses will be left on the outside, looking in.
If your business misses out on this second round of funding, are you completely out of luck? Thankfully, the answer is no, the CARES Act still provides you with a couple of options to soften the blow of the current pandemic. Depending on your business and how it is affected, you may even come out better in the long run by not taking a PPP loan.
Both options involve your business’ payroll taxes. The first option provides that certain businesses that do not get PPP loans may be eligible for payroll tax credits or even refunds. The second option allows all businesses that have not yet applied for forgiveness of a PPP loan to defer the payment of payroll taxes over the next two calendar years.
In addition to requiring that a business not receive a PPP loan, the payroll tax credit option offered under Section 2301 of the CARES Act is only available to businesses during a calendar quarter in which they: (1) are either subject to a government order fully or partially suspending the business’ operations; or (2) suffer a significant decline in gross receipts during a calendar quarter. Many businesses, including restaurants not able to serve dine-in guests, hotels, and any business not deemed essential and subject to a shutdown order, will meet the first standard. A “significant decline in gross receipts” necessary to meet the second standard is a 50% reduction in gross receipts for a 2020 calendar quarter as compared to the same calendar quarter in 2019. This “decline” is deemed to continue through the calendar quarter following the first calendar quarter in which gross receipts are greater than 80 percent of the same quarter for the previous year.
If your business qualifies for the tax credit, what do you get? Employers will get a credit against their share of employment taxes equal to 50% of the first $10,000 paid to each employee during a calendar quarter. For example, for each employee making over $40,000 annually, the employer would earn a $5,000 payroll tax credit per affected quarter. In addition, if the amount of the credit exceeds the payroll taxes paid, the employer will receive a refund from the government. Wages subject to this credit do not include paid leave under the Families First Coronavirus Response Act, since those wages are already subject to a payroll tax credit under that statute.
There is one further important qualification for these tax credits. If the employer had more than 100 employees in 2019, the credit/refund is only available for wages paid to individuals who are not performing services for the employer due to the pandemic. If the employer had less than 100 employees in 2019, the credit may be taken for wages paid to any employee during a shutdown or significant decline in gross receipts.
In addition to the payroll tax credits available under Section 2301, Section 2302 of the CARES Act allows for employers to defer those Social Security taxes that it does owe for wages paid in 2020 by several years. Under the statute, 50% of these payroll taxes must be paid by the end of 2021, with the remainder being paid by the end of 2022.
Unlike the payroll tax credits, employers can defer payroll tax payments even if they applied for and received a PPP loan. The only limitation is that employers lose the right to defer payroll taxes if they have their PPP loan forgiven. Thus, as the IRS recently clarified, employers who have received PPP loans may get tax deferral through the date that they receive a decision from their lender on loan forgiveness. By contrast, employers who have not obtained PPP loans may get deferral for Social Security taxes for the remainder of 2020.