25 Jun PPP Loans: Business owners should think before seeking forgiveness.
The Paycheck Protection Program (PPP) officially closed to new applications at the end of May after doling out billions in forgivable loans to needy small businesses around the country. Most of these businesses used the money to help pay their employees and other operating expenses while they navigated the unprecedented economic recession caused by the pandemic and related government shutdowns. The PPP is a forgivable loan. Now, many small-business owners have started the process of applying for forgiveness with their lenders.
But wait… should they?
Maybe. But there’s another option that should be considered. Instead of designating its payroll costs to get forgiveness on its loan, a small-business owner can instead use those same funds to apply for another stimulus benefit: the Employee Retention Tax Credit — or ERTC. Doing so may result in even more cash back from the government and a greater overall savings.
Qualifying for an ERTC
To qualify for an ERTC, a business must have experienced a full or partial shutdown ordered by the government — such as sending employees home to work — during the first three-quarters of 2020 or any quarter in 2021. Or a business can prove that its revenue loss was greater than 50% in any quarter of 2020 or just 20% in any quarter of 2021 compared to the same, pre-pandemic quarter in 2019.
If those eligibility requirements are met, then the ERTC can provide a giant tax credit for the business owner.
How much can you get from the Employee Retention Tax Credit?
Thanks to the American Rescue Plan Act, and other stimulus bills before it, the credit can be as much as $5,000 per employee annually in 2020 for qualified wages paid between March 13 and December 31, 2020. For 2021, the maximum more than quadruples to a $28,000 credit per employee annually. Certain start-up businesses — those started after February 15, 2020, that were forced to shut down due to a government order — may also be allowed a credit of up to $50,000 per worker per quarter.
How does the ERTC work?
The ERTC is taken against an employer’s payroll taxes on its quarterly payroll tax returns. Just about all employers, even nonprofits, can take advantage. More importantly, the credit is refundable. This means that the employer can receive the money back in cash if it is larger than the taxes due. And most importantly, a small business that hasn’t yet taken advantage of the credit for 2020 or 2021 has until April 15, 2025, to go back and amend a prior payroll tax return.
Why not take advantage of both PPP and ERTC?
You can. There is no double-dipping. A payroll expense cannot be claimed as an ERTC wage and claimed on the PPP forgiveness application as a forgivable payroll cost. If you pay someone a wage, you can take it for PPP forgiveness or for the ERTC, not for both. There is a real opportunity to leverage one or the other. We are working with our clients to model the potential impact of applying applicable 2020 and 2021 wages towards ERTC first. Then, the remaining wages go towards PPP Loan forgiveness. Many of our clients have found ways to maximize both the ERTC and PPP so that they get to keep 100 percent of PPP funds while applying for ERC credits on another payroll. We can analyze the break-even points.
What happens if you don’t apply for forgiveness?
If you don’t apply for forgiveness on your PPP loan, you’ll owe the money back to the government. It’s a five-year term but the interest rate is only 1%. There’s also another cost to consider: taxes. PPP forgiveness is nontaxable for federal, Pennsylvania, and New Jersey state tax purposes. But tax credits like the ERTC will reduce employer payroll expenses. This effectively increases net income and, therefore, the income taxes a company owes.
So what to do? We are telling our clients to consider both approaches carefully.
Be sure to let us know if you have questions by contacting us at assist@reconciledsolutions.net.
