How businesses can use new coronavirus tax credits and programs

COVID-19 has caused many businesses to be concerned about short-term liquidity. New federal legislation has created many programs aimed at solving this liquidity problem. Three of these programs are interrelated and aimed at ensuring that small businesses are able to continue to pay employees and meet their normal operating costs.

Two payroll tax credit programs are aimed at providing assistance to businesses continuing to pay wages to individuals who are either directly affected by COVID-19 or where the business has suffered hardship or shutdown as a result of the pandemic.  

The third plan is a forgivable loan program intended to allow businesses to cover operating expenses throughout the term of the pandemic and recover quickly once the outbreak is under control. Employers taking part in the Paychecks Protection Program are not eligible for the Employee Retention Credit.

Below is a short description of each of these programs:

1. Payroll credit for sick/family leave: Available for payroll and health care expenditures to individuals who are directly affected by the illness. This includes those who have the coronavirus, are quarantined, caring for a family member who has the virus, or caring for a child whose school or day care is closed because of COVID-19. The credit is equal to wages paid and group health care costs subject to limitations. This credit is only applicable to sick/family leave paid after April 1, 2020. (Congress passes Families First Coronavirus Response Act)
2. Employee Retention Credit: Payroll credit available for payroll and health care expenditures for employers who partially or fully shut down operations due to a government order or suffer a greater than 50% decrease in revenues over the same quarter for the prior year. The credit is equal to 50% of up to $10,000 in wages and health care costs per employee. (Senate releases comprehensive COVID-19 pandemic relief package)
3. Paycheck Protection Program: Forgivable loan program intended to cover payroll costs, mortgage interest, rent and utilities paid over an eight-week period. The maximum loan is equal to the lesser of 2.5 times the business’s average monthly 12-month payroll or $10 million. Payroll does not include any amount of compensation in excess of $100,000 to a single employee. Loans issued before June 30, 2020, will receive a minimum deferral of interest and principal payment of six months and a maximum of one year. Additionally, loans will be forgiven to the extent they are utilized for the payment of intended expenses. This forgiveness is decreased based upon a decrease in employment or compensation levels. (CARES Act expands access to loans for small and midsize businesses)

The application of these liquidity programs is complicated, and each individual situation will result in a different answer as to which programs would be most beneficial to your company. Some of the variables that will have to be considered include:

1. Salary levels: Each of these credits and loan forgiveness programs has a different level of applicability, and employers cannot benefit from multiple programs for the same wages.
2. Employment levels: While the tax credits do not have requirements that employers retain a certain percentage of the workforce in order to receive forgiveness of the debt, the Paychecks Protection Program does. There are mechanisms allowing employers to rehire and pay employees who were laid off; however, a careful analysis of the best answer will be required.
3. Expectation of duration: The payroll credits enacted as a part of the legislation are intended to defray the costs of retaining and paying employees; however, in most circumstances they will not cover the entire amount of payroll costs. Decisions will have to be made based upon your expectation of the duration of the business slowdown and the business’s liquidity situation.
4. Challenges in hiring: As a result of these challenging times, many businesses are considering furloughing or terminating members of their workforce. It is important to consider the long-term viability of the organization and the challenges faced when hiring qualified employees in the months before the start of the outbreak.

Example one: Consider an employer with 50 employees. Five of these full-time workers contract the coronavirus and are advised to self-quarantine after April 1, 2020. Ten employees are required to stay at home to watch children because their schools and day care have been closed after April 1, 2020. Because of a government order, the employer is also required to undergo a shutdown on March 16, 2020. After the shutdown, the employer continues to pay the employees at their normal annual rate. The employer does not apply for the Paycheck Protection Program.  

Under these circumstances, the employer would qualify for the following:

1. Payroll credit for sick leave: The employer would be required to pay employees who contracted the virus for up to 80 hours of sick leave at 100% of their salary and qualified health care costs capped at $511 per day. The employer would qualify for a payroll tax credit equal to the amount required to be paid as sick leave. This credit would be available on the company’s quarterly payroll tax return and any amount remaining after being utilized to pay payroll taxes could be refunded.
   
2. Payroll credit for sick leave: The employer is required to pay all 10 employees staying home to watch children because of school or day care closures two-thirds of their regular compensation, with qualified health care costs capped at $200 per day for up to 80 hours. The employer would qualify for a payroll tax credit equal to the amount required to be paid as sick leave. This credit would be available on the business’s quarterly payroll tax return and any amount remaining after being utilized for payroll tax payments could be refunded.
3. Payroll credit for family leave: After the first 80 hours of paid sick leave, the employer is required to continue paying the 10 employees in the second scenario above at two-thirds of their regular compensation, with qualified health care costs capped at $200 per day, with a limit of $10,000 per employee. The employer would qualify for a payroll tax credit for these wages equal to the amount of wages paid to the employee, also capped at $10,000 per employee. This credit would be available on the business’s quarterly payroll tax return and any amount remaining after being used for payroll tax payments could be refunded.
4. Employee retention credit: For employee wages not taken into account under scenarios one through three above, the employer would qualify for a payroll credit equal to 50% of the first $10,000 of wages and qualified health care costs related to the period following the government-ordered shutdown.  
5. Employee retention credit: For those employees mentioned in scenarios one through three above, the employer would receive a credit equal to 50% of the first $10,000 of wages and qualified health care costs related to the period included in the government shutdown order for which the employee was not covered under the payroll credit for sick or family leave.

Example two: Consider the same facts as in example No. 1, except the employer applies for and receives a forgivable loan under the Paycheck Protection Program.

1. Payroll credits for sick and family leave: The employer is still eligible for the credits outlined in scenarios one through three in example No. 1.
2. Maximum loan amount: The employer is eligible for a loan equal to 2.5 times the average monthly payroll, including qualified medical expenses excluding (a) amounts of compensation in excess of $100,000 annually to any single employee, and (b) individuals covered under the payroll credit for sick leave and the payroll credit for family leave.
3. Effect on employee retention credit: The employer is no longer eligible for the employee retention credit outlined in items four and five of example No. 1.
4. Forgiveness amount: The employer will be eligible for forgiveness of the loan equal to amounts expended for (a) payroll costs subject to limitations in scenario two above; (b) payments of interest on any mortgage in existence Feb. 15, 2020; (c) rent obligations on any lease in existence Feb. 15, 2020; (d) utility payments over a period of eight weeks following acceptance of the loan. This amount is subject to reduction if employment decreases.
5. Tax treatment of amounts forgiven: Any amount forgiven under these rules is not subject to taxation as cancellation of debt income.