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COVID-19 Payroll Credits and the Benefit of Filing Form 7200 for Advanced Refunds

Geoffrey Kayton, CPA

4.17.20 | Client Alert – COVID-19 Update

The federal government recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Families First Coronavirus Response Act (FFCRA) to mitigate the economic impact of the COVID-19 pandemic.  The principal purposes of the Acts include the injection of liquidity into the economy.  As such, the Acts’ small business provisions primarily address continuity of payroll, debt obligations, rent, and utilities.  While the objective is clear, the speed with which this response was introduced has generated both confusion and anticipation—leading to many questions and the need for additional guidance.

In an effort to provide insight on the payroll tax credits included in the Acts, this article provides details on the payroll credits available and the associated Form 7200 as well as an analysis of the interplay between the credits and some of the business provisions recently enacted.

The Credits

The calculations for these credits – Employer Retention Tax Credit (ERTC) and Qualified Sick and Family Leave Credits (SFLC) – are based on payroll metrics.  As such, these amounts are claimed either on the new Form 7200 (discussed below) and/or the employer’s federal payroll forms.  Generally, the SFLC (effective April 1) provides full reimbursement of qualified wages for sick and family leave, up to a certain cap, in the form of payroll tax credits.  The sick and family leave is temporarily mandatory for certain employers.  Credits for these payments immediately offset the Social Security portion of an employer’s payroll tax, and any amount of residual credit exceeding the total balance on the employer’s payroll form is refundable. The ERTC (effective March 12) is based on wage payments and number of employees retained.  This credit – also refundable – is equal to 50% of qualified costs and is limited to $5,000 per employee.  The SFLC is includable in gross income and the ERTC reduces otherwise allowable payroll deductions.  For more details see Employer Retention Credit and Qualified Sick and Family Leave Credits.

The Form

Form 7200 – Advance Payment of Employer Credits due to COVID-19 – allows an employer to request an advance payment of these credits.  The form can be filed in any month before the end of the quarter in which the qualified wages are paid.   If Form 7200 is not filed prior to the end of the quarter, the credit is claimed on the respective payroll tax form.  Any excess credit amounts will be refunded, assuming the employer has no past-due balance (IRC § 6402).  The IRS has not directly addressed an overestimated credit claim, but since it’s ultimately settled on the respective payroll form, those penalty and interest provisions should apply.  Employers should retain documentation substantiating credit calculations, eligibility, and copies of related forms for four years.  The IRS has made it clear this form is not for SFLC for self-employed individuals that would otherwise be refundable on a Form 1040 related to Schedule C.

The Interaction

It’s worthwhile to address how some of these provisions relate to one another, because there are several stimulus provisions in the CARES Act that can be utilized, even concurrently with the FFCRA provisions.  To generate liquidity, an employer may use the two credits discussed above and/or apply for a Paycheck Protection Program loan (PPP), which also uses payroll for its underlying calculations.  If an employer receives a PPP loan, then the ERTC is not available.  While the SFLC is available to employers who obtain a PPP loan, for purposes of determining PPP payroll costs, qualified sick and family leave wages (for which a credit is allowed under FFCRA) are explicitly excluded. (For more on PPP loan click here).  The CARES Act also includes a separate provision for payroll tax deferral, which is available to any employer, unless and until a PPP loan is forgiven.  Once forgiveness is obtained, this deferral is no longer available.  Half of any amount deferred is due December 31, 2021, and the other half is due December 31, 2022.

These provisions are difficult to navigate, and new developments, which continue to change the way each is interpreted, are disseminated daily. Accordingly, it’s best to stay in contact with your business advisors.  Berdon is continuously dissecting these provisions to ensure our clients can make informed decisions.

If you are struggling to decide which stimulus program is right for your business and want to understand your options and the various implications, please reach out to your Berdon Advisor.

Berdon LLP New York Accountants