CARES Act: Business Tax Provisions for Tribal-Owned Businesses
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) grants many significant tax benefits to help tribal businesses stay afloat and retain employees in addition to the new SBA loans under the Paycheck Protection Program ("PPP") covered here. This article summarizes the tax benefits that are expressly aimed at businesses. Some of these programs are not allowed to be used in concert with the PPP, so be sure to review all your options before taking advantage of any programs.
Employee Retention Payroll Tax Credit (ERC)
The Employee Retention Payroll Tax Credit is meant specifically to help eligible employers (defined as an employer engaged in a trade or business) that have been affected by COVID-19 -- either because they fully or partially suspended operations as a result of a government order or their gross receipts declined by more than 50% compared with the same quarter in 2019. If the tribal business employer qualifies for the payroll tax credit because of a downturn in business, the payroll credit will continue each quarter (through December 31, 2020) until the gross receipts for a quarter increase to 80% of the gross receipts for the same quarter in the prior year.
The credit is calculated each quarter and equals 50% of the qualified wages paid to each employee during that quarter up to $10,000 of wages per employee (with a maximum credit per employee of $5,000, taking into consideration all calendar quarters) “Qualified wages” for these purposes include the value of health plan benefits. It was intended to mimic a 50% cut in payroll expenses and enable medium and large businesses to retain their workforce, according to Senator Patrick J. Toomey. The credit is refundable and is limited to the employer portion (6.2%) of Social Security or Railroad Retirement payroll tax paid by the employer during that quarter. The credit is only available for qualified wages paid after March 12, 2020, and before January 1, 2021.
For qualified tribal businesses employers with fewer than 100 employees (average in 2019), all employee wages count as qualified wages in the calculation of the credit. For qualified tribal business employers with more than 100 employees (average in 2019), wages are qualified wages when they are paid to employees who are not providing services due to a government order or downturn in business.
Example for Q2:
This credit may be claimed against the employer portion of employment taxes, including Social Security and Railroad Retirement payroll taxes, when the employer files the quarterly 941 payroll tax return. To the extent the credit exceeds the employer portion of employment taxes due, the credit is treated as an overpayment and is refundable to the employer.
Furthermore, a tribal business can defer deposit and payment of the employer share of the payroll tax pending the calculation and reporting of the tax credit on their quarterly tax return. This allows the tribal business to retain its portion of the payroll tax and use these funds for paying wages. Please refer to IRS Notice 2020-22 for more information about deferral of deposits or payments of payroll taxes.
The IRS has issued guidance, including FAQs, for reporting the credit and claiming a refund.
Please note that a tribal business that has a loan under the PPP of the CARES Act is not eligible for this tax credit. In addition, any wages used in determining the new payroll tax credit for family medical leave or sick leave under the Families First Coronavirus Response Act may not be considered in determining qualified wages for this credit.
Deferral of Payroll Taxes
Usually, employers pay a 6.2% Social Security or Railroad Retirement tax on employee wages, in addition to 1.45% for the employers' share of Medicare taxes. A provision of the CARES Act allows (a) all employers to defer payment of the employer's share of the Social Security tax that would otherwise have to be paid in connection with their employees for 2020, and (b) self-employed individuals to defer payment of 50% of the Social Security component (12.4% total, 6.2% deferrable) of the self-employment tax that would otherwise have to be paid in connection with their self-employment tax liability for 2020. Half of this deferred tax liability will be due by December 31, 2021 and the other half will be due by December 31, 2022. Essentially this deferred tax liability can be considered an interest-free loan. The deferral does not apply to Medicare taxes and it does not apply to the employee's contribution to Social Security.
An employer who has small business loans forgiven under the PPP is not eligible for the deferral of payroll taxes. However, employers who have received a PPP loan may defer deposit and payment of the employer's share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer's share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer's share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the "applicable dates" of December 31, 2021 and December 31, 2022, respectively.
The provision also states that if an employer directs a certified professional employer organization or other third party (i.e. a payroll company) to defer Social Security withholding under this Act, then the employer is solely liable for the eventual timely payment of the taxes.
Tribal Enterprise Considerations
Even though tribal-owned enterprises formed under Section 17 or tribal law are typically non-taxable for federal income tax purposes, they are still liable to pay the employer portion of the Social Security (payroll) tax. Thus, tribal-owned enterprises should be eligible for either the payroll tax deferral or the employee retention tax credit.
But, because these tax benefits will be limited for tribal enterprises that receive a PPP loan, tribal enterprises with less than 500 employees should carefully evaluate which program(s) work best for their financial situation. Other tribal enterprises that don't qualify for the PPP benefit, such as gaming or lending enterprises or enterprises with more than 500 employees, will be eligible for these tax benefits.
For more information, please contact your Quarles & Brady attorney or: