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Paycheck Protection Program or Tax Credits: Which Is Best for Your Small Business in the Time of Covid-19?

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Core Group

Wow!  What a whirlwind the last week has been.  Congress passed the CARES Act last Friday, and there is a ton in there to digest.  For a current summary of all of the provisions, check out our COVD-19 Page.  A lot of changes for all business owners, but let’s dig into one that is probably most urgent.   

In this article we’re going to focus on two programs in the CARES Act, the Paycheck Protection Plan and the Employee Retention Tax Credits, and give you information to determine which is best for your business.  You cannot participate in both of these programs, so you need to pick one based upon your circumstances.


Paycheck Protection Plan

This is a forgivable loan program guaranteed by the SBA.  The loans themselves will be made through SBA approved lenders.  The terms are generous:

  • Loan Amount is 2.5 times average eligible payroll expenses.
  • Maximum loan amount is $10 million.
  • You can include $100k of owner’s compensation as eligible payroll expenses.
  • To the extent that you spend the loan on eligible payroll expenses PLUS rent (or mortgage interest) and utilities during the 8 weeks after funding, the loan is forgiven.
  • Any amount not forgiven is repaid within 2 years with a fixed interest rate of 1%.
  • No personal guarantee or collateral are required.

Essentially this is the federal government paying for your payroll expenses for the next two months.  Sounds great, so why wouldn’t you do it?  Here are a few reasons:

  • You are NOT eligible to take the Employer Tax Credits discussed below.
  • You don’t have your financial records in order to apply for the loan.
  • You don’t have a relationship with an SBA approved bank.
  • Timing.  You may be able to pay your employees for the next 2 months, but do you have anything for them to do?  If it doesn’t make any economic sense to keep employees, then all you’re doing is jumping through hoops for your employee’s benefit.


Employee Retention Tax Credits

Your business is eligible if you are partially suspended operations from a governmental authority or f your revenues are down 50% or more, measured by the last 90 days compared to the previous year. You are eligible for a 50% credit for wages paid up to $10k (for a maximum credit of $5k per employee).  There is no application process, you just take the credit on your tax return when you file.  Additionally, you can obtain an advance on the credit by completing IRS Form 7200.

Here are the details on the credit:

  • Employers who participate in the Paycheck Protection Plan are not eligible for the credits.
  • Credit covers wages from March 12, 2020 until the end of the year.
  • No overall dollar limit on the credit.
  • Wages paid under the newly mandated sick leave are not eligible for the credit.
  • You can continue to take the credit until the end of 2020, but only if your revenue doesn’t go back above 80% of prior years (measured quarterly).


So Which Do I Do?

I would strongly encourage you to click the button below and schedule a consultation, because every business is different, and there is more in the CARES Act than these two programs.  Essentially the Employee Retention Tax Credits provide more flexibility and are easier to obtain (essentially just keep records and file your taxes), but it is limited to 50% of wages.  This credit also doesn’t apply to the local and state taxes, rent (or mortgage interest), or utilities.

The Paycheck Protection Plan potentially is a 100% reimbursement for payroll expenses (plus rent and utilities), but it takes effort to apply, time to get your money, and more restrictions, specifically you have to spend it in 8 weeks.


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