Written by Robert Lowe
If you didn’t get a Payroll Protection Program (PPP) loan before the SBA ran out of funds, there are still other benefits available under the CARES Act that was recently passed by Congress.
The CARES Act also provides for the Employee Retention Credit (ERC) which is a tax credit equal to 50 percent of the qualified wages paid to employees up to $5,000 per employee. If you get a PPP loan, one big negative consequence is that you cannot claim the ERC. So each business needs to make a determination of whether it’s better off with a PPP loan or ERC. This is a complicated decision which will vary from business to business.
As an initial matter not all businesses are eligible for the PPP. Businesses with more than 500 employees are not eligible for the PPP. Also if your business is organized as a partnership or an LLC taxable as a partnership, only the partnership or LLC is eligible for the PPP. Although the individual partners are not eligible for a PPP, the amounts distributed by the partnership to the partners are taken into account in determining the amount that can be provided under a PPP loan.
By contrast any business is eligible for the ERC if it has been forced to close or it has experienced a 50% decline in revenue as a result of government stay at home orders. The ERC can be claimed with respect to wages paid any time after March 12, 2020 and up to December 31, 2020. If the employer had more than 100 employees in 2019, the credit can be taken only against wages paid to employees who are not providing services. If the employer had 100 or fewer employees in 2019, the credit can be taken against any wages. A portion of the employer’s health plan expenses can also be taken into account as wages for this purpose.
In addition, if the business receives a government loan other than under the PPP, for example an Economic Injury Disaster Loan or a loan under the Main Street Lending Program for businesses with between 500 and 10,000 employees, the ERC remains available.
The ERC is claimed as a credit against the employer’s share of FICA taxes that would otherwise be payable. If the amount of the credit exceeds the FICA taxes that would otherwise be payable, the employer can claim the credit against withheld income taxes that otherwise would have to be paid to the IRS or can file Form 7200 with the IRS to claim the balance.
The ERC is a tax credit which never has to be repaid. By contrast the PPP is a loan that has to be repaid although some or all of the loan may be forgiven to the extent loan proceeds are used for qualified expenses during the 8 weeks after the loan is received. By contrast the ERC can be applied to wages payable any time during the balance of 2020.
Bottom line: the determination of whether a business is better off with the PPP or ERC is a complex decision which will vary among businesses. You can’t have both! At the present time the SBA is no longer taking PPP applications but may do so again if Congress extends the program. Even if the PPP is extended there is no guarantee that all employers will qualify for the loan or, if they do, whether they will qualify for loan forgiveness. In some cases the ERC may provide a more certain, faster and potentially greater benefit.