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Updated PPP FAQ Clarifies Tax Credit Availability for Businesses

Posted on May 28, 2020

An update to Paycheck Protection Program (PPP) guidance fixes a technical glitch that had worried some businesses that repaid loan amounts and wanted to instead use the employment tax credit.

The FAQ on the small business loan program was updated May 27 to reflect a change to question 45, which now says employers that repay PPP loans by the May 18 safe harbor deadline will be eligible for the employee retention credit.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) gave employers options for paying workers during the economic shutdown as the nation tries to halt the spread of COVID-19. The options include an employee retention credit that is fully refundable and applied against the employer’s portion of payroll taxes, but only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.

Employers can forgo that credit and instead apply for a PPP loan under the CARES Act to help with payroll costs. The CARES Act modified section 7(a) of the Small Business Act to create the PPP and provides loans for small businesses that are forgivable on a tax-free basis if a specified portion of the proceeds is used for payroll.

The PPP was initially more popular than the credit because businesses wanted the free money, but that changed after it was revealed that large public companies received millions in loans while smaller companies were shut out. The Small Business Administration and Treasury warned that employers that received loans but had access to other sources of liquidity could be in trouble.

The government initially gave businesses that received loans but arguably didn’t need them until May 7 to return the money.

On May 6 the government issued FAQ 45, which says an employer that returns the loan by the extended date of May 14 could still qualify for the employee retention credit.

A week later, FAQ 47 was added to extend the repayment safe harbor to May 18. Practitioners welcomed the news, but said it was unclear whether a business that repaid its PPP loan between May 14 and May 18 would still be treated as if it hadn’t received the loan in the first place and therefore be eligible for the credit.

The government answered that question by updating FAQ 45.

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