US President Donald Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the Act) on June 5, modifying certain provisions related to the forgiveness of loans under the Paycheck Protection Program (PPP). We recently published a LawFlash discussing these modifications.
In a welcome change, the Act permits employers that qualify for PPP loan forgiveness to continue to defer the employer’s share of Social Security taxes under Section 2302 of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Section 2302 of the CARES Act permits an employer to defer the deposit and payment of its share of Social Security taxes otherwise due during the period beginning on March 27, 2020 and ending on December 31, 2020. Half the deferred taxes are due on December 31, 2021, with the remaining 50% due on December 31, 2022.
To the extent that an employer is eligible for an employee retention credit under Section 2301 of the CARES Act and/or payroll tax credits for qualified leave payments under the Families First Coronavirus Response Act (FFCRA), those payroll tax credits will supplement (as opposed to substitute) the deferral of the employer’s Social Security tax. Therefore, as a practical matter, an employer may defer its share of Social Security tax prior to determining whether it is entitled to the leave credits under the FFCRA or the employee retention credit under Section 2301 of the CARES Act, and prior to determining the amount of employment tax deposits it may retain in anticipation of these credits.
Under the CARES Act and IRS guidance issued thereunder, an employer that received a PPP loan could continue to defer the deposit and payment of the employer’s share of Social Security tax due up until the point that the PPP loan was forgiven. Once the employer’s PPP loan was forgiven, an employer could continue to defer Social Security taxes that the employer already deferred, but the employer could not defer any employer Social Security taxes due after the date of forgiveness.
The Act eliminates this rule so that an employer that has a PPP loan forgiven may continue to defer its share of Social Security tax due even after it receives a decision from the lender that the loan has been forgiven. However, the Act does not address whether an employer that did not utilize the deferral provision under Section 2302 in anticipation of PPP loan forgiveness—because it could not stop its deposits fast enough or because of the ambiguity surrounding the interplay between the PPP loan and the Social Security tax deferral provisions of the CARES Act—is able to retroactively defer the employer’s portion of Social Security taxes already deposited. The draft Form 941 instructions, dated June 1, 2020, provide that an employer cannot defer taxes it has already paid.
However, the American Bar Association (ABA) submitted a letter to the Internal Revenue Service (IRS) on May 12, 2020 recommending that the IRS issue guidance providing that an employer may offset against other employment taxes owed during the remainder of 2020, in order to recoup any otherwise forgone deferrals of employer Social Security tax.
We anticipate further guidance to address the issue raised by the ABA and resolve whether an employer may take full advantage of the deferral opportunity set forth in Section 2302.