Comparison of PPP to Employer Retention Credit
The recent amendment to the CARES Act included several modifications including an added $310 Billion to the Paycheck Protection Program (PPP). The SBA resumed accepting applications for the PPP Monday, April 27, 2020.
Keep in mind, that you cannot take advantage of loans under PPP and also claim the Employee Retention Tax Credit. Determining which one is the better option depends on the specifics of your business/organization, eligibility and necessity. While both programs are designed to help employers keep their employees, you should compare the options before deciding on a path.
Paycheck Protection Program
What:
Under the CARES Act, The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. The program allows loans up to $10 million or 2.5 times average monthly payroll costs (salaries, wages and commissions below $100,000; employers costs for health care benefits; employers costs for retirement benefits and state and local payroll taxes.) at 1% for the unforgiven part of the loan, which must be paid within 2 years.
The SBA will forgive some or all the loan. Loan forgiveness is determined based on the amount spent on permitted costs (payroll, rent, mortgage interest, utilities) during the 8-week period, commencing on the issuance of the loan. No more than 25% of the proceeds may be forgiven for the other costs. To receive loan forgiveness, a borrower must apply to their lender with documents verifying payments on the allowable expenditures. In addition, a portion of the amount spent on qualified costs during the 8-week period will not be forgiven if your company is not back to full employment level by 6/30/2020.
There are two calculations which may impact the level of forgiveness:
• Number of Full-Time Employees
• Actual Payment Costs (These are compared to pre-crisis amounts)
Who is eligible:
All businesses (including nonprofits, veterans’ organizations, Tribal business concerns, sole proprietorships, self-employed individuals and independent contractors – with 500 or fewer employees can apply.
How to Apply:
You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.
EMPLOYEE RETENTION CREDIT
What?
Eligible employers will receive a refundable payroll tax credit for up to 50% of wages paid (capped at $10,000 per employee) to an employee after March 12, 2020 through January 1, 2021.
The credit is:
- limited to a max credit of $5,000 per employee and cannot exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period,
- reduced by any credits received under the Families First Coronavirus Response Act,
- not available if an employer has taken a loan through the Payroll Protection Program,
- available for employers with more than 500 employees (unlike PPP),
- available to employers with greater than 100 employees, only with respect to wages paid to employees during the time that are not providing ANY services.
Wages include cash payments and employer-provided health care premiums. If the employer has more than 100 employees, only wages of employees who are furloughed or face reduced hours as a result of closure; or reduced gross receipts are eligible. If the employer has less than 100 employees, the credit is based on wages paid to all employees whether they worked full time or not, or are furloughed.
Who is Eligible?
An eligible employer is defined as any employer that is carrying on a trade or business in 2020 and for the calendar quarter:
- The operation of the business is fully or partially suspended dur to orders from a government authority limiting commerce, travel or group meetings due to COVID-19.
or
- Gross receipts are less than 50% of the gross receipts from the same quarter in the previous year until gross receipts are 80% of the gross receipts in the same quarter from the previous year.
IN SUMMARY
Choosing to use the Payroll Protection Program or Employee Retention Credit comes down to the details, eligibility, benefits and necessity.
Under the PPP, documentation must be provided to apply for forgiveness and forgiveness is not guaranteed. Further, Marco Rubio has announced that loans must be “necessary to support the ongoing operations for the business. The Small Business Committee will use subpoena power to identify anyone who gave false certification of the loan. Businesses applying for a PPP loan must certify that they have been harmed by the crisis and need the PPP loan to operate. Any company with revenue to cover operations isn’t eligible.” Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the
required certification in good faith.
Many businesses may not be eligible for the Employee Retention Credit unless they meet the requirements described in the enumerated section above.
Businesses must look at the overall picture before deciding to opt for a PPP loan or choosing an alternative such as the Employee Retention Credit. It is advised that you discuss such options with your Professional consider the best course and consider the changing landscape.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
Share Post:
