CARES Act Provider Relief Fund and Taxes: What You Need to Know

Published in Women's Health on August 31, 2020

In enacting the CARES Act, Congress did not specifically address the taxation of the Relief Payments. Although the IRS’s position is that its FAQ guidance is not citable as legal authority, it seems clear that the IRS expects taxpayers to rely on these FAQs and other recently issued FAQs to meet their federal income tax obligations during the coronavirus (COVID-19) pandemic.

The U.S. Department of Health and Human Services (HHS) has frequently updated its Relief Payments FAQs since April but had not addressed the taxability question in those HHS FAQs.

We will look at some applicable FAQs that confirm that Relief Payments to for-profit healthcare providers are taxable on receipt. You can find the CARES Act Provider Relief Fund FAQs on the HHS website.

Generally, if you’re are not tax exempt

Relief Payments issued to for-profit healthcare providers are includible in gross income under 26 U.S.C. § 61. The FAQs further clarify that the Relief Payments are not excludible from gross income under the qualified disaster relief provisions of 26 U.S.C. § 139 because a payment to a business, including a sole proprietorship, “does not qualify as a qualified disaster relief payment under section 139.”

Bottom line:  Yes, you should include them in your gross income. These will be taxable unless Congress intervenes!

Paycheck Protection Program (PPP)

Question:

I received funding through the Paycheck Protection Program (PPP). Are all otherwise deductible business expenses paid with PPP funding no longer deductible? Is this true? And if so, is this true both on the federal and state level?

Answer:

Yes. All of the US State Department of Revenues takes a “same as federal” position that certain otherwise deductible business expenses incurred in the taxpayer’s business related to the Paycheck Protection Program are not deductible on a federal or state tax return because the expenses are now allocable to tax-exempt income.

Relief Payment Observations

While the July 15 deadline for both first and second quarter 2020 estimated business tax payments has passed, it is important for recipients of relief payments, particularly for-profit providers, to immediately understand the impact of these funds on those estimates and prepare to make future remittances accordingly.

Several HME Relief Payment recipients have opted to return some or all unused Relief Payment funds to HHS. The timing of the return of such amounts, whether it be within the taxable year of receipt or in a subsequent year, will have an impact on whether and how these portions of the Relief Payments are reported for tax purposes.  Contact your tax advisor now with questions.

While the FAQs provide helpful clarity, there is some discussion whether if Congress intended to treat the Relief Payments as not taxable for all recipients.  If this is the case, it is clear – again- that a legislative fix will be needed.

CARES Act and Business Payroll Taxes

Borrowers with Forgiven PPP Loans Can Defer Payroll Tax Deposits

Section 2302 of the CARES Act provides that, through December 31, 2020, employers may defer the deposit and payment of the employer's portion of Social Security taxes. Half of the deferred amount is due on December 31, 2021, and the other half is due on December 31, 2022.

On June 26, the IRS updated FAQ #4 on CARES Act Payroll Tax Deferrals, confirming that an employer who has a Paycheck Protection Program (PPP) loan forgiven under the CARES Act is entitled to defer payment and deposit of the employer’s share of Social Security tax. The update to FAQ #4 follows the enactment of the Paycheck Protection Program Flexibility Act (P.L. 116-142), which eliminated the CARES Act provision that had prevented an employer from deferring the deposit and payment of its share of Social Security taxes after its PPP loan was forgiven.

An employer that receives a PPP loan can defer payment and deposit of the employer’s share of Social Security tax not only while the PPP loan is outstanding, but also after the loan is forgiven.

The CARES Act payroll tax deferral provision essentially gives employers a two-year, interest-free loan from the federal government of approximately 6.2% of an employer’s payroll (up to $137,700 per employee, which is the 2020 Social Security wage base cap). Employers are not required to apply for or take any other steps to qualify for this “loan.”

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