For PPP loans, small-business owners should stop and think before seeking forgiveness
There’s another option that should be considered.
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.
But PPP is a forgivable loan and 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.
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.
Thanks to the American Rescue Plan Act, and other stimulus bills before it, the credit can be as much as $5,000 per worker annually in 2020 for qualified wages paid between March 13 and Dec. 31, 2020. For 2021, the maximum more than quadruples to a $28,000 per employee annually. Certain start-up businesses — those started after Feb. 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.
“This is a significant opportunity to infuse cash into their business,” says Tom Hammond, a vice president at the human resources giant Paychex. “The payback our customers are seeing is significant.”
The ERTC is taken against an employer’s payroll taxes on its quarterly payroll tax returns, so just about all employers, even nonprofits, can take advantage. More importantly, the credit is refundable, which means that if it’s larger than the taxes due, the employer can receive the money back in cash. 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.
So why not take advantage of both PPP and ERTC? You can. But you can’t use the same payroll dollars to apply for PPP forgiveness and to apply for the ERTC. This presents an interesting decision for small-business owners that received a PPP loan.
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, which will effectively increase net income and therefore the income taxes a company owes.
So what to do? Accountants and financial advisers are telling their clients to carefully consider both approaches.
For example, Stephen Slade, a partner at CPA firm WouchMaloney in Philadelphia, doesn’t think forgoing PPP to create a loan that must be paid back makes sense for some of his clients. Slade says that his firm is advising eligible clients to take advantage of the ERTC for 2020 and then use its remaining payroll dollars to reduce its PPP loan. “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 other payroll,” he says.
Mitch Gerstein, a senior tax adviser at Isdaner & Company in Bala Cynwyd, agrees that focusing just on the ERTC and not paying down their PPP loan may not be the best strategy for some businesses. “It really depends on factors like their cash flow, how big their loan is and what the net savings would be, if any, given the potential tax consequences of using credits,” he says. “There’s lots of moving pieces.”
But Paychex’s Hammond says that there’s a real opportunity to leverage one or the other. “We’re working with our clients to model the potential impact of applying applicable 2020 and 2021 wages towards ERTC first with the remaining going towards PPP forgiveness,” he says.
In the end, experts are strongly advising small businesses to consult with their financial advisers or payroll services and crank through the numbers. It’s possible that foregoing PPP forgiveness in lieu of taking full advantage of the ERTC may be the right move for some.
“The key is to involve the experts who can analyze the break-even points,” Slade says.
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.