Businesses are considering other options as the loan program aimed at keeping their employees working runs out of funding, but tax professionals warn that one option comes with significant risks.
Employers were given options under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) for how to stay afloat and continue paying their workers during the economic downturn. The most attractive option was the Paycheck Protection Program (PPP), which provides businesses with a loan that’s forgivable on a tax-free basis as long as the requirements are met.
But the nearly $350 billion allocated to the PPP has already been claimed, and it will take another round of federal legislation to fund it. According to the Small Business Administration’s website, which is in charge of implementing the loan program, it’s “currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding.”
One group is sounding the alarm, hoping to light a fire under lawmakers to expand funding for the program.
“This program was rolled out with remarkable speed, and while there have been some bumps along the way, small businesses view the Paycheck Protection Program as a critical lifeline,” Barry Melancon, president and CEO of the American Institute of CPAs, said in an April 16 statement. “We need to extend that support so we can protect workers and ensure our economy can rebound quickly once restrictions are lifted.”
In the meantime, however, it’s back to the drawing board for businesses.
Other options under the law include a refundable tax credit for employment taxes and deferring employment tax payments. Businesses that took the loan gave up their ability to take advantage of the refundable tax credit, but because the credit is limited to $5,000 per employee, it isn't an attractive option for most.
Ticking Time Bomb
Employers can also take advantage of employment tax deferral and the loan program until the loan is forgiven, then deferral is no longer an option. However, practitioners warn that deferring employment taxes until 2021 and 2022 can be a ticking time bomb for some businesses.
For a strong business with a secure balance sheet, deferring employment taxes is a great idea now that it’s temporarily allowed under the CARES Act, Joe Kristan of Eide Bailly LLP told Tax Notes.
“For a struggling business, though, it can be dangerous,” Kristan said. “It’s borrowing without collateral or credit evaluation, and that often ends badly. When the deferral comes due, it might put the business over the edge.”
Kristan said failing businesses often struggle with compliance, which can make the debt harder to discharge in bankruptcy.
But for some businesses, they need to do whatever it takes to stay open, said Troy Lewis, a professor at the Brigham Young University Marriott School of Business.
“If your boat is sinking, you’re only worried about bailing water,” Lewis said. “You’re not really worried about how you’re going to pay for the bailing bucket a couple of years from now.”
Lewis agreed that employment tax deferral is kicking the can down the road, because the business must make enough to cover its regular cash flow needs in the coming 18 months, plus play catch-up on its deferred payments.
Lewis said he isn't knocking businesses for taking advantage of employment tax deferral under the CARES Act — for many, doing so is necessary to keep people employed. The deferral essentially acts as an interest-free loan, but it’s better than a loan — there’s no application, there are no covenants, and there’s the time value of money built in, Lewis said.
“It’s a wonderful tool in that sense, but it’s still a loan,” Lewis added.
Signs of Trouble
Christopher J. Wittich of Boyum & Barenscheer PLLP said some clients are simply going to forget that they still owe the payroll tax in the future, but the fact that they can’t pay their portion of employment taxes now means they’re already in serious trouble.
“Realistically, if the employer’s share of Social Security is the difference between keeping the doors open and shutting down, then a business needs a lot more help than the payroll tax deferral can offer,” Wittich said. And when weighing the employment tax deferral against the PPP loan, it’s a no-brainer that the loan should be the first choice, he added.
Wittich said his firm is advising use of the employment tax deferral only for clients who don’t qualify for the PPP loans, which so far has been wealthy self-employed individuals who have a business that isn’t being affected right now.
The SBA and Treasury recently released guidance on the application of the loan program to self-employed individuals. The guidance states that partners in partnerships can’t apply for loans, and sets out mechanical steps on how much can be borrowed and forgiven for self-employed workers.
After the release of the guidance for self-employed individuals applying for the PPP, it still appears that the PPP loan is a much better deal than payroll tax deferral, Wittich said. “The payroll tax deferral seems like an option only for those who aren’t able to qualify for a PPP loan,” he added.
But with the loan program on hold, some companies may have no choice but to take advantage of the other CARES Act provisions to keep their employees working.