Posted by Michael D. Kelly, CPA
In our continued effort to provide guidance to companies and nonprofits, we have outlined three important topics in this edition of our BLS Important Update. Our firm has received numerous questions on the topics below and have prepared a summary to help provide clarity.
Treatment of Owners and Forgiveness of Certain Payroll Costs
On 8.27.2020 the Small Business Administration issued an additional interim rule providing new guidance to companies and nonprofits that received a Payroll Protection Program (PPP) Loan specific to the treatment of owners and the forgiveness of certain payroll costs. Below are the highlights:
- Previous guidance capped the amount of loan forgiveness for owner-employees of S- and C-corporations to 8/52 or 2.5/12 of 2019 compensation limited to $15,385 or $20,833, respectively. The cap depends on whether the 8- or 24-week covered period was utilized. There was confusion regarding the definition of an owner-employee which the new guidance attempts to clarify:
- An owner-employee of a S- or C-corporation is defined as anyone who owns 5% or more of the business. The interim rule is silent for general partners of partnerships indicating any general partner would be subject to the compensation limit.
- The interim rule also provides clarity as to the allowable uses of rent or mortgage costs that can be utilized in the forgiveness calculation:
- Amounts paid during the covered period that are attributable to subleasing operations of the PPP applicant cannot be used in the forgiveness calculation. For example, if a borrower pays rent or mortgage interest of $10,000 during the covered period and subleases a portion of the building for $2,500, only $7,500 of costs can be included in the forgiveness calculation.
- A borrower who claimed the home office deduction on his 2019 Schedule C can use the related non-payroll costs in the forgiveness calculation.
- Rent payments to a related party are only includable in the forgiveness calculation up to the amount of mortgage interest that was owed during the covered period. Any common ownership between the applicant and the property owner is a related party for these purposes.
Families First Coronavirus Response Act: Employer Paid Leave Requirements
The Family First Coronavirus Response Act (FFCRA) requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. A detailed outline of these requirements can be found on the U.S. Department of Labor’s website. However, there is confusion because not all employees are eligible for leave under the FFCRA.
- For example, under the FFCRA certain health care providers and emergency responders are excluded from the definition of eligible employees.
Payroll Tax Deferral
On 8.8.2020, President Trump issued an executive order allowing employers to defer the employees’ share of social security taxes. On 8.28.2020, the IRS and Treasury Department released Notice 2020-65 which summarizes rules surrounding the executive order. Below is our firm’s interpretation of this Notice.
- The Notice does not state it is mandatory for employers to defer the social security withholding.
- The Notice does not state that employees can demand employers to defer the withholding.
- Deferred withholdings would have to be paid back by the employee in January – April of 2021 through their paychecks. Essentially, the employee would have twice the normal amount of payroll taxes withheld from their paycheck during this time period, which would significantly reduce their take home pay.
- Employers should be cautious as the responsibility for withholding and remitting deferred payroll taxes in 2021 can be risky if there is a change in employment status for the employee.
- If Congress decides to eventually forgive these taxes in the future, it is unclear what would happen for those employers who do not elect to defer the taxes.
BLS will continue to send important updates as information becomes available. Please be sure to visit our COVID-19 Resource Center for past guidance updates and additional details. Reach out to your BLS Team Member or email us at firstname.lastname@example.org with any questions.
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