Paycheck Protection Loan or Employee Retention Credit
By Jennifer Allen, CPA and James Bailey, CPA
Businesses and nonprofit organizations that are deemed “non‐essential” during the COVID‐19 crisis and are, thus, subject to shutdown orders, may find that they have difficulty qualifying for forgiveness of the loans available under the federal government’s new Paycheck Protection Program (PPP).
Since the PPP and the new Employee Retention Tax Credit cannot both be utilized by the same company, some employers may want to evaluate both options and decide which would be best for their unique circumstances.
In order to qualify for 100% loan forgiveness under the PPP, borrowers who have already laid off workers must rehire employees by June 30 to maintain the same headcount and salary levels. But in the case of non‐essential businesses – such as restaurants, medical and dental practices, and retail stores – that means rehiring workers during a period when they are under orders to remain closed.
Even though the PPP loans cover all payroll costs, including salary, wages and commissions, taxes, costs related to group health care benefits, and paid sick leave, the loan amounts are limited to two‐and‐a‐half months of payroll costs.
However, if the COVID‐19 outbreak continues into the summer and shut down orders are extended for several months, employers could face a conundrum. If they obtain a PPP loan and then lay off their workers when the PPP funds run out, they must repay the money because the CARES Act requires them to keep workers on the payroll through June 30, 2020, to qualify for loan forgiveness. But if they keep the workers on their payroll, they will have to pay them at a time when their revenues have dropped or disappeared, because the PPP funds may be exhausted.
Consider a dental office where the dentist has laid off 15 employees. The dentist is still available for emergency appointments, but those are few and far between, and she doesn’t need employees there to assist. She still must pay overhead costs such as rent and utilities while the practice is closed, which the PPP loan would cover. But in order to qualify for full loan forgiveness, 75 percent of the PPP funds would have to be used to cover payroll costs in the first 8 weeks of receiving the funds.
In the dentist’s case the Employee Retention Credit may make more sense. It enables any employer whose business was deemed non‐essential and is subject to a stay-at-home order or one that has a decline in gross revenue by 50% or more evaluated on a quarterly basis, to take a 50 percent credit against the first $10,000 in wages paid to employees. So, the maximum benefit is $5,000 per employee. The dentist can apply it against payroll tax deposits that she would pay, as she does not have to wait until filing the payroll tax return. Assuming she is able to take the maximum credit for each employee, her total credits could be worth $75,000, and she is only paying employees when she is back open.
Another scenario involves a restaurant that has three locations and is still selling carryout and delivery meals, though it has had to lay off 12 wait staff because its dine‐in operation has been shut down due to the COVID‐19 crisis.
With the carryout and delivery income, the restaurant’s current revenue is about 40 percent of its normal level, and the company expects this to continue for at least the next six weeks. With just 40 percent of its normal revenue, the company is not profitable.
Because the company would have to take a large amount in PPP loans to rehire all of its workers, and because there is no guarantee that the restaurant would be able to re‐open its dine‐in operations by the end of the loan period, it probably does not make sense for this company to take the PPP loan with the expectation of full forgiveness.
If the company wants to rehire some workers to perform delayed maintenance or deep clean the restaurant properties while the dining rooms are closed, it would make more sense to take out a smaller loan to help them make payroll for the next six weeks.
If the company decided to utilize the Employee Retention Credit, it would not be required to rehire any of the laid off workers during the shutdown period. Moreover, employers can use the Employee Retention Credit proceeds immediately to fund the eligible wages for the workers they still have on staff by utilizing funds they have set aside to pay federal payroll (Social Security) taxes. If you do not have adequate funds set aside for those taxes to fully fund your Employee Retention Credit, you may file a Form 7200 Advance Payment of Employer Credits Due to COVID‐19 to claim an advance refund for the full amount of the anticipated credit.
Pressure to Act Quickly
You may be feeling pressured to decide immediately about applying for a PPP loan because it is widely believed that the $349 billion that has been authorized for the loans will dry up quickly.
But take a moment to catch your breath and weigh whether a loan that you may end up having to pay back is better than the tax credit that can produce cash for you almost as quickly.