Updated: May 6, 2020
Loans, Tax Credits, & Tax Implications: Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020)
Enacted on March 27, 2020 the Coronavirus Aid, Relief & Economic Security Act (“CARES Act”) contains several important tax provisions (and potentially forgivable) loan benefits for businesses and individuals to expand business access to capital.
In general, as stimulus support during COVID-19, borrowers may apply for different types of Small Business Administration (SBA) loans, either administered directly through the SBA or through permitted third-party lenders. Although limited funds are available, there are several limitations with claiming the Paycheck Protection Program (PPP) loans and other tax benefits available under the CARES Act.
For example, by combining the [refundable against payroll taxes] Employee Retention Credit with the Payroll Tax Deferral under the CARES Act, employers may reduce (or receive a cash refund) their 2020’s Social Security tax and defer the remaining balance due to 2021 and 2022, subject to further guidance by the IRS and/or U.S. Treasury Department. Although the payroll deferral under the CARES Act is essentially an interest free loan, the amount payroll taxes incurred will still need to be paid in the near future.
However, employers must decide which relief program they qualify (e.g. PPP loan forgiveness v. Employee Retention refundable payroll tax credits) and intend to use because utilization of loan forgiveness options under the CARES Act may then disqualify the use of the both the Payroll Deferral and Employee Retention Programs to that specific taxpayer seeking financial support.
Regardless of whether your business pursues PPP loan forgiveness or Employee Retention Credits, taxpayers should also strongly consider whether their business is eligible (e.g. less than $5M in gross receipts) for up to $250,000 per year in R&D tax credit payroll offset opportunities as an immediate and supplemental cash saving opportunity in addition to claiming either the CARES Act PPP or Employee Retention Credit stimulus support. Taxpayers and recently formed businesses across all industries may qualify for the R&D credit.
Subject to further guidance by the IRS and/or U.S. Treasury, if your business does qualify for the R&D tax credit payroll offset, one potential tax strategy to maximize your cash flow in the short-term may include (1) maximizing and claiming R&D tax credits (non-refundable) against your business payroll taxes, then (2) applying the Employee Retention Credits (up to $5,000 refundable per employee) to eliminate any remaining payroll liability (which may even turn into a cash refund) to maximize both R&D and Employee Retention credits simultaneously.