(Photo by William Campbell/Corbis via Getty Images)
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Congress provided a lot of economic stimulus money in recent legislation, but each small business has to choose which program will provide it the most support. The choice isn’t always easy or obvious. Small business owners have to navigate through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
One choice is the combination of claiming tax credits and deferring payroll tax deposits. The other choice is a small business loan that can be converted into a grant, known as the Paycheck Protection Program (PPP). The two are mutually exclusive. If you take a PPP loan, you can’t claim the tax credits or defer payroll tax deposits.
The PPP is available to a business with 500 or fewer employees. Loans administered through the Small Business Administration are applied for through banks and other financial institutions. For restaurants and hotels, the 500-employee limit applies to each location, not the total business.
A loan is forgiven and turned into a grant if the business maintains its payroll for at least eight weeks and uses the loan proceeds only to pay salaries and essential operating expenses, such as interest, rent and utilities. It’s likely, according to the IRS, that no more than 25% of the loan can be for non-payroll costs for the loan to be forgiven.
The business must maintain its existence, but it doesn’t have to be open and operating during the crisis and employees don’t have to work to receive their payroll. The goal is for businesses to continue to pay employees through the crisis.
Even if the loan is turned into a grant, the interest (initially set at 1%) still must be paid. The IRS hasn’t said whether forgiveness of the loan is taxable income.
The maximum loan amount is the lesser of $10 million or 2.5 times monthly payroll, with payroll capped at $100,000 per employee. Terms of the loans are set by the SBA.
The tax credit is the employee retention tax credit (ERTC).
The credit is taken against payroll taxes. Businesses eligible for the tax credit are those whose operations have been suspended by a government authority or have experienced a 50% or greater decline in taxes receipts for any quarter in 2020 compared to the same quarter in 2019. Eligibility for the credit ends with the first quarter in which the employer’s gross receipts are greater than 80% of its gross receipts for the same quarter in 2019.
The credit is 50% wages paid, up to $10,000 per employee, from March 12 through December 31, 2020. That means a business receives a maximum credit of up to $5,000 per employee against its 2020 payroll taxes (both Social Security and Medicare taxes). In other words, the government pays for up to $5,000 of salary per employee.
The credit is refundable, so a business receives a payment from the government if the amount of the credit exceeds the payroll taxes due.
A business with fewer than 100 employees can take the credit against the wages of all employees. Larger businesses can take the credit only against wages paid to employees who aren’t providing services because of the effects of the pandemic.
In addition to the ERTC, an employer can defer deposits of payroll taxes due in 2020. Employers must pay one-half of the postponed amounts before the end of 2021 and the other half by the end of 2022.
A business essentially chooses either the loans/grants under the PPP program or the ERTC and postponement of payroll tax deposits. Each business will have to run the numbers to determine which choice improves cash flow the most. Keep in mind that using the ERTC means you forego taking the work opportunity tax credit. A general rule is that businesses with highly-paid employees will benefit more from the PPP loans/grants. Businesses with less-highly-paid employees will benefit more from the ERTC.
Here’s one way to analyze the choices.
A restaurant has 50 employees (most of whom work part-time) with an average annual salary of $20,000 and a monthly payroll of $83,333. Under PPP, the restaurant can borrow up to 2.5 times monthly payroll, or $208,333. The loan will be forgiven if the restaurant maintains its payroll level and meets the other PPP requirements.
But under the ERTC the restaurant would be due a refundable payroll tax credit equal to $250,000 ($5,000 per employee). The employee retention credit generates more cash flow than a PPP loan/grant.
A professional services firm has 50 employees with an average salary of $80,000 for a monthly payroll of $333,333. The maximum PPP loan is $833,333. The ERTC maximum is the same as for the restaurant, $250,000, because of the $5,000 per employee cap. The PPP loan/grant generates more cash flow for this business.
Another consideration is the speed in which the money might be received. The PPP requires applying for a loan and waiting for it to be approved. The ERTC and postponement of tax deposits can be taken immediately, though there will be a wait for any refundable portion of the tax credits.