On its website, the IRS has clarified that Paycheck Protection Program (PPP) loan recipients that pay back the loan by May 7 (potentially May 14) can be eligible for the employee retention credit.
Background—employee retention credit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by Eligible Employers to certain employees during the COVID-19 crisis (the “employee retention credit” or credit). The IRS has issued detailed FAQs regarding the employee retention credit.
Background—PPP. Under the Act, a recipient of a loan (covered loan) made pursuant to the PPP may use the proceeds to pay payroll costs, certain employee benefits relating to healthcare, interest on mortgage obligations, rent, utilities, and interest on any other existing debt obligations.
The Small Business Administration (SBA) regulations of April 28, 2020 note that the Act requires the recipient to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the [recipient].” The regulations say that any borrower that applied for a PPP loan prior to the issuance of regulations and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
The May 7 date was subsequently changed to May 14.
Background—interaction between PPP and employee retention credit. In FAQ 79 of the IRS Website, the IRS said that an employer may not receive the employee retention credit if the employer receives a PPP loan. An Eligible Employer that receives a PPP loan, regardless of the date of the loan, cannot claim the Employee Retention Credit.
Revised rule for PPP loans. In newly added FAQ 80, the IRS clarifies that if an employer repays its PPP loan by May 7, 2020, then the employer will be treated as though the employer had not received a PPP loan for the purposes of claiming the employee retention credit and may be considered an “Eligible Employer.”
Observation. In light of the update on the Treasury Department website, presumably the May 7 date referenced in FAQ 80 will be updated to May 14.
Source: Thompson Reuters Checkpoint Newsstand 5-7-20