Guidance on Payroll Tax Deferral and PPP Loan Forgiveness

Guidance on Payroll Tax Deferral

On August 28, 2020, the IRS issued IRS Notice 2020-65, which provides guidance for implementing the Presidential Memorandum dated August 8, 2020, whereby the President directed the Secretary of the Treasury to defer withholding and payment of the employee portion of certain payroll tax obligations.

The Notice allows employers to defer withholding on certain employee compensation during the last four months of 2020 and then withhold those deferred amounts from the employees’ paychecks during the first four months of 2021.   An employer can only defer such payroll tax obligations for employees whose wages or compensation paid for a bi-weekly period is less than the threshold amount of $4,000.   Eligibility is based on a period by period basis.  Amounts deferred in 2020 are required to be withheld and paid ratably from wages and compensation paid between January 1, 2021 and April 30, 2021.  If not paid back during this time, interest, penalties and additions to tax will start to accrue as of May 1, 2021.

It appears that, under the Notice, an employer will be responsible for remitting the deferred payroll tax on behalf of the employees and will ultimately be responsible for the deferred payroll tax liability of an employee who is terminated prior to May 1, 2021.  This ambiguity creates risk to employers that they may have to cover deferred payroll taxes unless they are otherwise able to arrange to collect the tax from the terminated employee.  At this time, there is no guidance as to whether the deferred payroll taxes will ultimately be forgiven.  Employers should therefore review the risk/benefit of allowing employees to defer their payroll tax obligations under the IRS Notice.  Since deferred withholding is not actually required under the Notice, employers may not want to start deferring such withholding unless additional guidance is issued.

Guidance on PPP Loan Forgiveness

On August 24, 2020, the Small Business Administration (“SBA”) released an additional interim final rule providing further guidance on the Paycheck Protection Program (PPP) loan forgiveness requirements.  The rule specifically clarified the SBA’s intended treatment of owner-employee compensation thresholds and the treatment of certain non-payroll costs.  A summary of the key changes are set forth below:

• Owner-Employee Thresholds:  The SBA clarified that owner-employees who hold less than a five percent ownership interest in a PPP borrower that is either a C or S corporation will not be subject to previously issued owner-employee compensation rules.  That rule limited the amount of compensation paid to the shareholders of a corporate borrower that may be eligible for forgiveness.   Please see our article on June 5, 2020 for more details on the owner-employee compensation rules initially enacted by the SBA.   This new guidance will allow a greater portion of compensation related to small shareholders to be eligible for forgiveness.  This rule is intended to cover owner-employees who do not meaningfully influence decisions over how loan proceeds are allocated.
• Lease Related Non-Payroll Costs.   The new rule states that amounts attributable to the business operation of a tenant or sub-tenant of a PPP borrower will not be eligible for forgiveness.  Further, the rule clarifies that a borrower with a mortgage on the property may not receive forgiveness on the portion of mortgage interest that is attributable to the pro-rata portion of the property that is leased out to other businesses.  The new rule also states that rent payments made to a related party of the borrower may still be eligible for forgiveness if the amount of loan forgiveness requested for such rent or lease payment is not more than the amount of mortgage interest owed on the property during the Covered Period attributable to the space rented, and the lease and mortgage were entered into prior to February 15, 2020.

This article is for informational purposes only and is not intended to be legal advice. If you have any questions on the above, please reach out to Jason Schneider at Schneider Law Group at (919) 324-3599 or at jschneider@schneiderlawgroup.com.

Schneider Law Group is a business boutique law firm primarily focused on general corporate, M&A, securities, and tax strategy for growth-oriented businesses.  For more information, please visit www.schneiderlawgroup.com.