Menu
Tax Notes logo

Payroll Tax Memo Could Pose Trouble for PPP Loan Recipients

Posted on Aug. 17, 2020

Employees who take President Trump up on his offer to defer their payroll tax obligations through the end of the year might inadvertently create headaches for their employers that took Paycheck Protection Program (PPP) loans.

Overlap between the covered period for PPP loans and the employee payroll tax deferral period that runs from September 1 through December 31 could complicate employers' efforts to qualify for or maximize their loan forgiveness, according to Veena K. Murthy of Crowe LLP.

“Right now, there are PPP borrowers who are trying to do calculations for loan forgiveness,” Murthy told Tax Notes. “So they are trying to make sure they maximize on payroll costs towards this end.”

Payroll costs as defined for the PPP include the employee portion of payroll taxes, which are the subject of Trump’s August 8 payroll tax deferral memo. If an employer receiving a PPP loan opted to use the extended 24-week covered period for its loan, it might not be able to include its employees' deferred payroll tax contributions in the calculation for payroll costs because the cost wouldn’t be incurred until after the covered period, Murthy explained.

The loan forgiveness rules for the PPP require that at least 60 percent of the funds be used for payroll costs, so if employee payroll tax deferral is thrown into the mix, PPP loan recipients may find their payroll costs reduced. “Unwittingly, the employer/PPP borrower could impact the amount of loan forgiveness it obtains under the PPP program,” Murthy said.

“Given that the employee [payroll] tax deferral is not mandatory, PPP borrowers are well advised to not implement it for this reason alone,” Murthy said, although she noted there are other reasons employers and employees might want to avoid the employee payroll tax deferral opportunity.

A Better Way

“This type of impact on taxpayers is an unfortunate injury that can result when actions are done ad hoc and not under the proper channels,” said Murthy, a former legislation counsel for the Joint Committee on Taxation. “This is why we have Congress handle things like this and not Treasury,” she added.

Earlier congressional pandemic relief efforts, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) and the Families First Coronavirus Response Act (P.L. 116-127), created a number of tax provisions, but they were made to fit together, Murthy said. For example, payroll costs as defined under the PPP explicitly exclude the employer’s share of payroll tax costs because another provision of the CARES Act already allows the employer to defer those taxes.

“Ideally, there’s a reason Congress crafts things the way they do, and you don’t want to mess with that,” Murthy said. “And if you make changes to things that affect that, you want to do it in that context and have the right people looking at it, all together.”

The issue created by the payroll tax memo is one that definitely would have been raised by JCT staff, but because the administration pursued this unilaterally, “that couldn’t happen through this process,” Murthy said. 

Wait and See

Other tax practitioners weren't so sure what consequences Trump’s memo might have on PPP loan recipients.

Adam Sweet of Eide Bailly LLP, a former IRS chief counsel attorney, said that Murthy’s example makes sense because the tax forms used to calculate payroll expenses likely won’t show the deferred amount. However, he cautioned that there is “still a ton of uncertainty with all this,” and that he was waiting to see what direction Treasury’s guidance takes.

Daniel F. Laughlin of FGMK LLC suggested that the employee payroll tax costs might still be incurred during the covered period of an extended PPP loan, because it’s just the payment that is being deferred. “You still incur the cost, so it’s still going to be a liability on your balance sheet, I would think,” he said.

Edward K. Zollars of Thomas, Zollars & Lynch Ltd. was even less certain about what the outcome might be. “Mostly any impact depends on exactly how Treasury designs the program, and perhaps what employers then do,” he told Tax Notes.

“The details really matter here, and right now no one has anything approaching details on the structure of this program,” Zollars said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

Copy RID