Posts tagged with "cares act"

AICPA makes PPP loan forgiveness recommendations

The AICPA on Wednesday issued a series of recommendations it would like to see the U.S. Small Business Administration (SBA) adopt and issue as guidance for small businesses to use in calculating loan forgiveness under the Paycheck Protection Program (PPP).

In the release, the AICPA urges that:

  • The eight-week covered period under PPP should align with the beginning of a pay period, not the date loan proceeds are received.
  • The eight-week period should be flexible, with businesses able to choose to commence it once stay-at-home restrictions are lifted instead of when loan proceeds are received.
  • Full-time equivalents (FTEs) should be calculated using a simple wage-based proxy when hours worked are not tracked by the employer (e.g., for salaried workers or those paid by piece).
  • Payroll reduction calculations should be based on an employee’s average payroll per week in the eight-week period compared to the prior quarter, rather than comparing total compensation in the periods. Loan forgiveness is reduced if an employee’s compensation decreases by more than 25% but an eight-week period will naturally have 33% less payroll than a 12-week quarter.

The AICPA also addressed the eight-week loan forgiveness period in a letter sent late Tuesday to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. In the letter, signed by AICPA President and CEO Barry Melancon, CPA, CGMA, the AICPA lays out the case for changing the current interpretation for when to start the eight-week period for the forgiveness calculation component of the program.

Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities. PPP borrowers can qualify to have the loans forgiven if the proceeds are used to pay certain eligible costs. However, the amount of loan forgiveness will be reduced if less than 75% of the funds are spent on payroll over an eight-week loan forgiveness period.

Current guidance from Treasury and the SBA interprets the eight-week period as beginning on the date the lender makes the disbursement of the PPP loan to the borrower. However, the AICPA says, with many states still shut down by government order, most small businesses are unable to bring their employees back to work. For those businesses, starting the loan forgiveness clock on the date the lender disburses the funds means the recipient business must either pay employees while it is unable to operate or forgo the maximum amount of loan forgiveness. Flexibility in the start dates of the eight-week period would position more small businesses to survive and contribute to an economic rebound while working within the parameters of the CARES Act and subsequent guidance.

To address this problem, the AICPA letter urges Treasury to “[i]mmediately take a very simple but critical step and define the origination date as the date on which a state’s shelter-in-place order is lifted and businesses are authorized by government to return to full operations. This will provide the necessary flexibility for the 8-week clock to start, businesses to bring back employees and to pay sufficient payroll to meet the 75% requirement.”

Recommendations provided

The AICPA has received numerous questions from CPAs about the loan forgiveness portion of the PPP. Many of those inquiries have sought answers on the documents and calculations that should be used in applying for loan forgiveness to be awarded.

In response, the AICPA has developed recommendations for applying for loan forgiveness that have been added to earlier recommendations on how to apply for PPP loans. The full list of recommendations is available on the AICPA’s website.

The AICPA said in the release that it has requested further clarification on how reductions in forgiveness are to be applied. Specifically, the AICPA is seeking clarity regarding how reductions in forgiveness are to be applied and whether the CARES Act lists forgiveness reductions in the intended order of application, as some of the forgiveness requirements cause a dollar reduction while others produce a percentage reduction. The order in which these are applied can have a significant impact on the forgiveness amount.

The AICPA’s recommendations were made in consultation with an AICPA-led small business funding coalition, CPA firms, and other key stakeholders. They build on previous guidelines the AICPA has provided to help bring clarity to the implementation of the PPP.

The PPP so far

Congress established the PPP through the CARES Act, which was signed into law on March 27. The program is available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees in certain industries also can apply for loans, according to the SBA and Treasury.

SBA lenders were flooded with PPP applications from businesses in need of resources to help their businesses as the coronavirus pandemic and the consequences from social-distancing requirements devastated the economy. By April 16, the SBA had stopped accepting applications for the PPP after exhausting the initial $349 billion in funding. Last week, Congress approved an additional $370 billion in funding for small businesses, with $310 billion in fresh funds provided to the PPP. The application window for the second round of PPP funding opened Monday.

The AICPA’s Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.

 Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.

Employer Social Security Tax Deferrals

The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes.

Employers pay Social Security taxes at a rate of 6.2% on the first $137,700 of wages paid to employees for calendar year 2020. The CARES Act allows all employers to defer payment of employer Social Security taxes that are otherwise owed for wage payments made after March 27, 2020, through the end of the calendar year. Instead of depositing these taxes on a next-day or semi-weekly basis, the deposit due date for 50% of the taxes is deferred to December 31, 2021, with the remaining 50% deferred until December 31, 2022.

All employers should work with their payroll provider, payroll departments or payroll software to immediately begin deferring these employer Social Security taxes. The only possible exception is employers that are applying for the Small Business Administration (SBA) loans under the CARES Act. Even these employers are eligible for the deferrals until they receive loan forgiveness.

Section 2302 of the CARES Act does not apply to the employee’s share of Social Security tax, the employee or employer’s share of Medicare tax, or to the Additional Medicare tax imposed on employees with Medicare wages in excess of 200K. In addition, filing deadlines for reporting the employee and employer portions of Social Security and Medicare taxes have not been delayed by the Act.

Please note, an employer is ineligible to defer paying its portion of Social Security tax if it acquires a loan through the Paycheck Protection Program, established by section 1102 of the CARES Act, for which all or part of the loan was or will be forgiven.

These FAQs address specific issues related to the deferral of deposit and payment of these employment taxes. These FAQs will be updated to address additional questions as they arise.

1. What deposits and payments of employment taxes are employers entitled to defer?

Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer’s portion of Social Security taxes and certain railroad retirement taxes. These are the taxes imposed under section 3111(a) of the Internal Revenue Code (the “Code”) and, for Railroad employers, so much of the taxes imposed under section 3221(a) of the Code as are attributable to the rate in effect under section 3111(a) of the Code (collectively referred to as the “employer’s share of Social Security tax”). Employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. (See FAQ 4).

2. When can employers begin deferring deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?

The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period.”)

The Form 941, Employer’s QUARTERLY Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020). Information will be provided in the near future to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020).  In no case will Employers be required to make a special election to be able to defer deposits and payments of these employment taxes.

3. Which employers may defer deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?

All employers may defer the deposit and payment of the employer’s share of Social Security tax. However, employers that receive a loan under the Small Business Administration Act, as provided in section 1102 of the CARES Act (the Paycheck Protection Program (PPP)), may not defer the deposit and payment of the employer’s share of Social Security tax due after the employer receives a decision from the lender that the PPP loan is forgiven under the CARES Act.  See FAQ 4.

4. Can an employer that has applied for and received a PPP loan that is not yet forgiven defer deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?

Yes. Employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates,” as described in FAQs 7 and 8.

5. Is this ability to defer deposits of the employer’s share of Social Security tax in addition to the relief provided in Notice 2020-22 for deposit of employment taxes in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act employee retention credit?

Yes. Notice 2020-22 provides relief from the failure to deposit penalty under section 6656 of the Code for not making deposits of employment taxes, including taxes withheld from employees, in anticipation of the FFCRA paid leave credits and the CARES Act employee retention credit. The ability to defer deposit and payment of the employer’s share of Social Security tax under section 2302 of the CARES Act applies to all employers, not just employers entitled to paid leave credits and employee retention credits. (But see the limit described in FAQ 4 for employers that have a PPP loan forgiven.)

6. Can an employer that is eligible to claim refundable paid leave tax credits or the employee retention credit defer its deposit and payment of the employer’s share of Social Security tax 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?

Yes. An employer is entitled to defer deposit and payment of the employer’s share of Social Security tax prior to determining whether the employer is entitled to the paid leave credits under sections 7001 or 7003 of FFCRA or the employee retention credit under section 2301 of the CARES Act, 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.

7. What are the applicable dates by which deferred deposits of the employer’s share of Social Security tax must be deposited to be treated as timely (and avoid a failure to deposit penalty)?

The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates (referred to as the “applicable dates”) to be treated as timely (and avoid a failure to deposit penalty):

  1. On December 31, 2021, 50 percent of the deferred amount; and
  2. On December 31, 2022, the remaining amount.

8. What are the applicable dates when deferred payment of the employer’s share of Social Security tax must be paid (to avoid a failure to pay penalty under section 6651 of the Code)?

The deferred payment of the employer’s share of Social Security tax is due on the “applicable dates” as described in FAQ 7.

9. Are self-employed individuals eligible to defer payment of self-employment tax on net earnings from self-employment income?

Yes. Self-employed individuals may defer the payment of 50 percent of the Social Security tax on net earnings from self-employment income imposed under section 1401(a) of the Code for the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period.”)

10. Is there a penalty for failure to make estimated tax payments for 50 percent of Social Security tax on net earnings from self-employment income during the payroll tax deferral period?

No. For any taxable year that includes any part of the payroll tax deferral period, 50 percent of the Social Security tax imposed on net earnings from self-employment income during that payroll tax deferral period is not used to calculate the installments of estimated tax due under section 6654 of the Code.

11. What are the applicable dates when deferred payment amounts of 50 percent of the Social Security tax imposed on self-employment income must be paid?

The deferred payment amounts are due on the “applicable dates” as described in FAQ 7.

 

What the Families First Coronavirus Response Act Means to Nonprofits

On March 19, the President signed into law, H.R. 6201, the Families First Coronavirus Response Act. The bill includes a complex set of temporary paid leave mandates and employer reimbursement provisions, as well as funding for free coronavirus testing, food nutrition security, and Unemployment extension.

Employment Provisions

The Families First Coronavirus Response Act imposes new job protections for workers, paid leave mandates on employers, and a generous reimbursement scheme for employers that are designed to hold nonprofit and for-profit employers. The law provides two weeks of paid sick leave, a subsequent ten weeks of partially paid family leave for care of a child, and refundable tax credits in many cases will result in the Treasury Department writing checks to employers to cover some of the costs of the mandates.

Two Weeks of Emergency Paid Sick Leave: The law (Section 5102) requires employers with fewer than 500 employees (including nonprofits) and government employers to provide their employees two weeks of paid sick leave, paid at the employee’s regular rate up to $511 per day, to quarantine or seek a diagnosis or preventive care for the coronavirus. It also requires payment at two-thirds the employee’s regular rate up to $200 per day to care for a family member for those purposes or to care for a child whose school has closed or child care provider is unavailable due to the coronavirus. These provisions expire at the end of December 2020.

The Secretary of Labor is authorized to exclude health care providers and emergency responders from the definition of employees allowed to take leave, exempt small businesses, including nonprofits, with fewer than 50 employees, and ensure consistency between paid family and paid sick standards and tax credits. In general, employees are entitled to 80 hours of paid sick time, and are immediately eligible for the leave under this bill.

Twelve Weeks of Emergency Family and Medical Leave: The law (Section 3102) expands the number of workers who can take up to 12 weeks of job-protected leave under the Family and Medical Leave Act for coronavirus-related reasons. After the two weeks of emergency paid leave (above), employees of employers with fewer than 500 employees will be eligible to receive at least two-thirds of each employee’s usual pay, up to $200 per day.  Employees must have been employed for at least 30 days to qualify and meet a “qualifying need related to a public health emergency.” The qualifying reasons for the emergency paid leave are caring for a child if the child’s school or childcare center is closed due to coronavirus. The provisions would also expire at the end of 2020.

Generally, employees taking Emergency FMLA have job protection, but the bill provides an exception for employers with fewer than 25 employees if the position no longer exists following leave due to operation changes from the public health emergency. Health care providers and emergency responders are also excluded from the definition of employees allowed to take this leave, and the law exempts small businesses, including nonprofits, with fewer than 50 employees.

Reimbursable Payroll Tax Credits Available: Employers paying for the mandated paid leave are entitled to claim a refundable tax credit. Specifically, the tax credit is allowed against the employer portion of payroll taxes, and any paid leave costs that exceed the amount of payroll taxes owed will be refundable to the employer at the end of each quarter. This means the federal government will cover all or a portion of the costs of these paid leave mandates. The amounts depend upon what the employee is doing.

Under the Paid Sick Leave Mandate: Employers paying for employees who must self-isolate, obtain a diagnosis, or comply with self-isolation recommendation with respect to coronavirus may receive tax credits of up to $511 per day. Payments to employees caring for a family member or for a child whose school or child care center is closed, qualified sick leave wages are capped at $200 per day. Both types of wages are capped at 10 days in the aggregate. (Section 7001)
Paid Family and Medical Leave Mandate: The refundable tax credit for qualified family leave provision is capped at $200 per day and $10,000 each quarter. (Section 7003)

FAQs: Employee Retention Credit under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, is designed to encourage Eligible Employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19, with an employee retention tax credit (Employee Retention Credit).

The Families First Coronavirus Relief Act (FFCRA) requires certain employers to pay sick or family leave wages to employees who are unable to work or telework due to certain circumstances related to COVID-19. Employers are entitled to a refundable tax credit for the required leave paid, up to specified limits. [See FAQs]. The same wages cannot be counted for both credits.

Basic FAQs

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.

Eligible Employers for the purposes of the Employee Retention Credit are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either:

  • Fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
  • Experiences a significant decline in gross receipts during the calendar quarter.

Generally, tax-exempt organizations that are consider essential would not qualify under the fully or partially suspends its operations criteria, but they could still could qualify with the significant decline in gross receipts criteria.

Note: Governmental employers are not Eligible Employers for the Employee Retention Credit.  Also, Self-employed individuals are not eligible for this credit for their self-employment services or earnings.

The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.

Example: A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state in order to reduce the spread of COVID-19. However, the executive order allows those establishments to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. This results in a partial suspension of the operations of the trade or business due to an order of an appropriate governmental authority with respect to any restaurants, bars, and similar establishments in the state that provided full sit-down service, a dining room, or other on-site eating facilities for customers prior to the executive order.

A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019.  The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.

Example: An employer’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively.  Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively.  Thus, the employer’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively.  Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus the employer is entitled to a retention credit with respect to the first and second calendar quarters.

The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter.  The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the Eligible Employer for the qualified wages paid to Employee A is $5,000.

Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.

Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in section 3231(e) of the Code) paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.

The definition of qualified wages depends, in part, on the average number of full-time employees (as defined in section 4980H of the Code) employed by the Eligible Employer during 2019.

If the Eligible Employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.  For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.

No. The CARES Act does not require employers to pay qualified wages.  In addition, Eligible Employers may elect to not claim the credit for the Employee Retention Credit.  (The FFCRA does require certain employers to pay sick or family leave wages to employees who are unable to work or telework due to a COVID-19 circumstance.  These employers may be entitled to a refundable tax credit for those wages paid, although the employers may elect not to claim the credit.)

Eligible Employers may claim the Employee Retention Credit for qualified wages that they pay after March 12, 2020, and before January 1, 2021. Therefore, an Eligible Employer may be able to claim the credit for qualified wages paid as early as March 13, 2020.

No.  The Employee Retention Credit is only available with respect to wages paid after March 12, 2020, and before January 1, 2021.

The credit is allowed against the employer portion of social security taxes under section 3111(a) of the Internal Revenue Code (the “Code”), and the portion of taxes imposed on railroad employers under section 3221(a) of the Railroad Retirement Tax Act (RRTA) that corresponds to the social security taxes under section 3111(a) of the Code.

The credits are fully refundable because the Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes the Eligible Employer owes.  That is, if for any calendar quarter the amount of the credit the Eligible Employer is entitled to exceeds the employer portion of the social security tax on all wages (or on all compensation for employers subject to RRTA) paid to all employees, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) and 6413(a) of the Code.  Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the employment tax return and the amount of any remaining excess will be reflected as an overpayment on the return.  Like other overpayments of federal taxes, the overpayment will be subject to offset under section 6402(a) of the Code prior to being refunded to the employer.

Example: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the Eligible Employer for the qualified wages paid to Employee A is $5,000. This amount may be applied against the employer share of social security taxes that the Eligible Employer is liable for with respect to all employee wages paid in Q2 2020.  Any excess over the employer’s share of social security taxes is treated as an overpayment and refunded to the Eligible Employer after offsetting other tax liabilities on the employment tax return and subject to any other offsets under section 6402(a) of the Code.

Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return.  Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax. 

In anticipation of receiving the credits, Eligible Employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.

Yes. An Eligible Employer may fund the qualified wages by accessing federal employment taxes, including those that the Eligible Employer already withheld, that are set aside for deposit with the IRS, for other wage payments made during the same quarter as the qualified wages.

That is, an Eligible Employer that pays qualified wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment taxes it deposits for that quarter by half of the amount of the qualified wages paid in that calendar quarter.  The Eligible Employer must account for the reduction in deposits on the Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Example:  An Eligible Employer paid $10,000 in qualified wages (including qualified health plan expenses) and is therefore entitled to a $5,000 credit, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $10,000 in qualified wages.  The Eligible Employer has no paid sick or family leave credits under the FFCRA.  The Eligible Employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000.  The Eligible Employer is required to deposit only the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Yes.  An Eligible Employer will not be subject to a penalty under section 6656 of the Code for failing to deposit federal employment taxes relating to qualified wages in a calendar quarter if:

  1. the Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit,
  2. the amount of federal employment taxes that the Eligible Employer does not timely deposit, reduced by any amount of federal employment taxes not deposited in anticipation of the paid sick or family leave credits claimed under the FFCRA, is less than or equal to the amount of the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and
  3. the Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits. 

For more information, about the relief from the penalty for failure to deposit federal employment taxes on account of qualified wages, see Notice 2020-22 (PDF).

Yes.  Because quarterly returns are not filed until after qualified wages are paid, some Eligible Employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their qualified wages.  Accordingly, the IRS has established a procedure for obtaining an advance of the refundable credits.  

The Eligible Employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount.  If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the Eligible Employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.

If an Eligible Employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified wages in excess of this amount, it should not file the Form 7200.  If it files the Form 7200, it will need to reconcile this advance credit and its deposits with the qualified wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and it may have an underpayment of federal employment taxes for the quarter.

Example: An Eligible Employer paid $20,000 in qualified wages, and is therefore entitled to a credit of $10,000, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same calendar quarter.  The Eligible Employer has no paid sick or family leave credits under the FFCRA.  The Eligible Employer can keep the entire $8,000 of taxes that the Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941.  The Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.

Yes, but not for the same wages.  The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.  

No.  An Eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a paycheck protection loan should not claim Employee Retention Credits.

CARES Act Introduces Forgivable Loans for Nonprofits With Paycheck Protection Program

On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the sweeping legislation introduces a multitude of significant measures, the Paycheck Protection Program is a lifeline for nonprofits, injecting capital when they need it most. However, the hallmark of the program is that the loans can be partially or fully forgivable, provided certain criteria are satisfied.

What Is the Paycheck Protection Program?

  • The Paycheck Protection Program, which was allocated nearly $350 billion through the CARES Act, is an extension of the existing U.S. Small Business Administration (SBA) 7(a) Program.
  • Loan applicants may be granted up to $10 million with an interest rate not to exceed 4%.
  • The loans are nonrecourse, and collateral is not required to secure the loan.
  • The loan is forgivable if the employer maintains certain levels of full-time equivalents (FTEs) and payroll. The amount forgiven is based on a sliding scale through a compliance period.
  • Loan forgiveness under this program is non-taxable.
  • The new program waives the SBA’s “credit elsewhere” requirement, which determines whether the borrower has the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship.

Is My Nonprofit Eligible?

  • Applies to certain nonprofits including 501(c)(3) organizations with fewer than 500 employees.

What Are the Borrower Requirements?

Borrowers must make a good faith certification to the following:

  • Uncertainty of economic circumstances makes the loan request necessary to support ongoing operations.  This certification should take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.  If current economic circumstances support the likelihood that the employer will have to lay off employees, cut pay, or miss rent, mortgage, or utility payments then the statue would seem to be satisfied.   The loan applicant must be under enough financial stress that, without the PPP,  it would have to have pay cuts, layoffs, or missing rent, mortgage, or utility payments to stay financial healthy.  The loan is necessary to preserve the status quo regarding current business activity and related expenses.  The applicant only needs to exhaust those sources of liquidity that can be accessed in a manner that is not significantly detrimental to the business.
  • The Small Business Administration (SBA) has just released new guidance regarding the good-faith certification for Paycheck Protection Program (PPP) loans. This guidance, which was added as question #46 to the PPP FAQs, should come as welcome relief to many Nonprofits that took out PPP loans and have struggled with the good-faith certification. The SBA states that PPP loans with original principal amounts less than $2 million will be deemed to have made the certification in good faith.
  • Funds will be used to retain workers and maintain payroll or to make mortgage, rent, and utility payments.

What Is the Maximum Loan Amount I Could Receive?

  • The maximum loan amount for any recipient is $10 million.
  • Loans will be formula-driven: the average monthly payroll costs over the prior 12 months multiplied by 2.5.
    • In this calculation, payroll costs are categorized as follows:
Included
Excluded
Salary, wages, and commission Compensation for an employee that exceeds $100,000 (prorated over the covered period from Feb. 15, 2020, to June 30, 2020)
Cash tips or equivalents Compensation to an employee with a principal residence outside the U.S.
Vacation or other leave Qualified sick wages or family leave wages paid under Families First Coronavirus Response Act for which the payroll credit is permitted
Allowance for dismissal or separation Federal employment taxes including employees and employers share of FICA (Federal Insurance Contributions Act)
Payments for group health (insurance premiums)
Retirement benefits
Payment of state or local tax assessed on compensation

 

How Can I Use the Loan Proceeds?

The loan proceeds can be used for the following:

  • Payroll Gross Wages (at least 75% of the forgiven loan amount must be used for payroll) including paid leave and severance
  • Employer paid healthcare benefits (Medical, Dental, and Vision)
  • Employer paid retirement benefits
  • Employer paid state and local payroll taxes
  • Employee salaries, commissions, bonuses, or similar compensation that you would normally do
  • Interest on mortgage obligations (but not mortgage prepayments or principal payments)
  • Rent
  • Utilities (Water, Gas, Electricity, Telephone, and Internet)
  • Interest on other debt obligations that were incurred before Feb. 15, 2020

How Much of My Loan Will Be Forgiven?

Maximum Forgiveness Amount

  • Borrowers are entitled to loan forgiveness equal to the sum of the following expenses paid during the eight-week period, which begins on the loan origination date:
    • Payroll costs
    • Covered utility payments, including electric, gas, water, transportation, telephone, and internet access for which service began before Feb. 15, 2020
    • Covered rent obligation, including rent obligated under a leasing arrangement in force before Feb. 15, 2020
    • Covered mortgage interest obligation, including a mortgage on real or personal property incurred prior to Feb. 15, 2020
  • The loan forgiveness amount will not exceed the amount of the loan.   The PPP Loan Forgiveness appear to be based on full time equivalent not just headcount or number of employees as the application required.  Maintain proper documentation though the 8 week covered period.

Reduction of Forgiveness Amount

  • The loan forgiveness amount will be reduced if there is a reduction in the number of FTEs. This reduction percentage is calculated at the election of the borrower by either of the following:
    • Average number of FTEs per month (over the eight-week period)
      Average number of FTEs between Feb. 15, 2019, and June 30, 2019
    • Average number of FTEs per month (over the eight-week period)
      Average number of FTEs between Jan. 1, 2020, and Feb. 29, 2020
  • The loan forgiveness amount will be reduced by any reduction in total salary or wages of any employee that is in excess of 25%. This applies only to employees that received a 2019 annualized salary of less than $100,000.
  • There is a special rule for a reduction in seasonal employees.
  • Employers can mitigate – or eliminate these reductions – if they restore the number of FTEs and total salary by June 30, 2020.

Any balance remaining after the loan forgiveness would have a maturity of 2 years. The interest rate will be one percent for loans not more than $350,000; .50 percent for loans of more than $350,000 and less than $2,000,000; and .25 percent for loans of at least 2 million.  You will not have to make any payments for six months following the date of disbursement of the loan.

Loan Forgiveness Application

Documentation is critical for loan forgiveness. Here is a list of documentation that would need to be submitted to your lender:

  • Verification of FTEs and pay rates
  • Payroll tax filings
  • State income, payroll, and unemployment insurance filings
  • Documentation that covered mortgage, rent, and utility obligations were made
  • A certified statement that the amount of forgiveness was required to retain employees or meet the covered obligations

Lenders will have 60 days to render a forgiveness determination.   Borrowers may have to certify loan proceeds were used for authorized purposes.  You need to keep or increase your FTE count to maximize loan forgiveness.

The Small Business Administration (“SBA”) issued the Loan Forgiveness Application on May 15, 2020 and revised it on June 16, which may be accessed here. The application addresses a number of questions previously posed by borrowers, and we anticipate additional guidance regarding forgiveness to be forthcoming.

Congress passed the Paycheck Protection Flexibility Act to make it easier for small businesses and other PPP borrowers to qualify for full loan forgiveness. Among the changes in the act are an expansion of the “covered period” for loan forgiveness to 24 weeks from eight weeks, a reduction of the proportion of proceeds that must be spent on payroll costs to 60% from 75%, and the establishment of a safe harbor for businesses that have been unable to return to the level of business activity they had before the COVID-19 pandemic due to compliance with health and safety guidelines for slowing the spread of the virus.

PPP Loan Funds not subject to single audit

One of the most common questions we have received is whether SBA PPP loans obtained by NFPs are subject to the Uniform Guidance single audit requirements. The good news is that we have recently received an answer to this question. Based on recent discussions with SBA staff, we have been informed that PPP loans made to NFPs will not be subject to single audit.

PPP Loans:  Accounting Considerations from the AICPA

Keep in mind that whatever is not forgiven will continue to remain a loan payable.  You should consider comparing your allowable expenses for PPP versus your other federal grants and contracts.  There may be other allowable expenses your other federal funding can cover, including during the 8 week period.   Organizations receiving other federal funds cannot “double dip” meaning you cannot claim the same expenses twice to two different funding sources.

You need to start managing the loan by recording the loan in your general ledger.   You should create a long term liability account called PPP Loan Payable.  You will record the cash when loans proceeds are received and offset to PPP Loan Payable.    You should setup a contribution revenue account called PPP Loan Forgiveness or PPP Grant.  You will setup a funding source called Paycheck Protection Program to track all activity including allowable expenses and unallowable expenses.

You should setup an Interest Expense account for the portion in which forgiveness is not expected.    Accrue interest expense at 1% APR against the total loan amount until full forgiveness determined or all funds paid back.

On May 13, 2020, the AICPA, through the Center for Plain English Accounting (CPEA), released a report (“Accounting in the Fog of War – Treatment of PPP Loans”) to provide clarification on the accounting considerations.  Although the report is non-authoritative guidance, the CPEA is the AICPA’s national accounting and auditing resource center.   While there are several nuances to consider in the accounting that could impact the treatment and judgments that may been to be made by management, there are some overarching scenarios to review.

Scenario 1 – The Loan is Intended to be Repaid

If repayment is expected, the loan should be accounted for consistent with other debt arrangements (FASB ASC 470) and reported as a loan payable. If facts and circumstances change and partial or total forgiveness is obtained, the gain on extinguishment is recognized once the company is legally released as the primary obligor of the debt.

Scenario 2 – Partial or Total Forgiveness is Anticipated – Entity is a Not-For-Profit Entity

If partial or total forgiveness is anticipated for a not-for-profit (NFP), the report recommends accounting for the funds similar to other government grants under FASB ASC 958-605. Due to the forgiveness being conditional on incurring the qualified expenses (among meeting other criteria), the funds will be initially accounted for as a refundable advance and will generally be recognized into contribution revenue as the qualified expenses are incurred.  A key consideration in this treatment is that contribution revenue is only recognized as the conditions of the program are “substantially met;” for the portion in which forgiveness is not expected, no revenue should be recognized and interest will be accrued on the advance.  Accounting for the funds as Government Assistance under the International Accounting Standards (IAS) 20 model will record funds recognized into other income.

Please contact us for help with the Paycheck Protection Program.