The Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provided the largest economic stimulus in American history in hopes of combating the economic effects of COVID-19. $349 billion was set aside for the Paycheck Protection Program (PPP), which provides loans, sometimes forgivable, to eligible small businesses. As we noted earlier, many production companies and other businesses in the entertainment industry will likely qualify to receive funds under the PPP.
But what if a company does not qualify for a PPP loan? For example, larger entities ultimately might be ineligible because of the 500-employee cap for eligible businesses. For these companies that cannot access PPP funds (or choose not to), the CARES Act provides alternative potential payroll tax relief.
The CARES Act creates a fully refundable payroll tax credit, the Employee Retention Credit (ERC), for eligible employers that do not receive a PPP loan. Companies entitled to an ERC will be able to use federal employment taxes, including withholdings, that such companies should have otherwise remitted to the IRS to fund “qualified wages” (defined below). Notably, if a company determines that its ERC will exceed qualified wages, it can request an advance of the credit from the Internal Revenue Service (IRS) through IRS Form 7200.
Employers eligible for the ERC are those carrying on a trade or business during calendar year 2020 that either (1) fully or partially suspend operations during any calendar quarter in 2020 because of government orders limiting commerce, travel, and group meetings due to the coronavirus; or (2) experience a significant decline in gross receipts during a calendar quarter. For eligible employers, the ERC will equal 50% of qualified wages paid after March 12, 2020 and before January 1, 2021. The maximum credit allowed for each employee is $5,000 (i.e., 50% of $10,000 in qualified wages paid to such employee).
As the production of motion pictures and television series has taken an indefinite hiatus under government orders, many production companies and other entities in the entertainment business will likely be eligible under (1) above. If not, the company may still qualify under the significant decline in gross receipts provision in (2) above. A period of “significant decline in gross receipts” begins in the first quarter in which an employer’s gross receipts for a calendar quarter are less than 50% of its gross receipts for such calendar quarter during 2019 and ends upon conclusion of the next calendar quarter for which the employer’s gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter during 2019.
The size of a company does not affect its eligibility for the ERC. However, the company’s number of full-time employees will impact the “qualified wages” calculation. Qualified wages for companies that averaged more than 100 full-time employees during 2019 are the wages paid to an employee for the time that the employee is not providing services because of either (1) or (2) above. Furthermore, for such companies, qualified wages for each employee are capped at what such employee would have earned for the 30-day period just before the economic hardship period began. However, if the company averaged 100 or fewer full-time employees during 2019, all wages paid during the economic hardship period will be qualified wages.
For more details, examples, and frequently asked questions related to the ERC, including its interplay with the payroll tax credits under the Families First Coronavirus Response Act, see the IRS website.
Last, the CARES Act allows an employer that does not have any PPP debt forgiven to defer payment of the employer’s share of payroll taxes on wages paid from March 27, 2020 through December 31, 2020. 50% of any amounts deferred will be due by December 31, 2021, with the other half coming due on December 31, 2022. Companies that ultimately do not have any PPP debt forgiveness should take note and consider deferring their employer share of payroll taxes.
Ultimately, the CARES Act will have far-reaching effects within the entertainment business. Companies that do not receive aid under the PPP provisions should be aware of other facets of the CARES Act that might provide much-needed help with payroll taxes during this tough period.
In addition to our Close-Ups blog coverage of COVID-19, Venable has published general client alerts regarding the multitude of benefits available to businesses and individuals beyond the PPP and the payroll provisions of the CARES Act; see here for a discussion of expanded unemployment benefits and initial checks; here for discussion of expanded eligibility for small business disaster loans; here for a discussion regarding newly required paid sick and family leave for small businesses and the associated payroll tax credits under the Families First Coronavirus Response Act; and here for a discussion of changes to rules related to uses of retirement funds and minimum distribution requirements.
Special thanks to Sam Djahanbani for contributing to this post.