PPP And Employee Retention Credit
Loan Forgiveness and Tax Credits
Both the Paycheck Protection Program (PPP) and the Employee Retention Credit provide financial relief to businesses that retain employees. Employers should compare the benefits of both programs to confirm which program provides the most economic support for the business and the employees.
Paycheck Protection Program
The main driver of the small business stimulus in the CARES Act was the Paycheck Protection Program (PPP). Many small businesses have already applied for and received funding from the PPP. This FAQ will address what the funds can be used for and how to apply for loan forgiveness.
Frequently Asked Questions
What are permitted uses for PPP Loans?
- Payroll costs (as described below);
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020
When does loan forgiveness periods begin?
Subject to some exceptions, forgiveness is generally available for costs incurred with respect to thees items during the borrower’s “Covered Period,” which is the eight-week period that beings on the date the PPP loan was disbursed.
How will the amount of loan forgiveness be determined? Can a PPP loan be fully forgiven?
Yes, the amount of the loan can be fully forgiven as long as certain conditions are met. The specific amount will generally depend in part on what portion of the loan is used on eligible payroll costs and whether the employer has maintained staffing and pay levels during the covered period.
A loan may be fully forgiven if all the following three conditions are met:
- The loan proceeds are spent, or qualifying costs are incurred, within 8 weeks of receipt of the loan proceeds.
- At least 75 percent of the forgiveness amount was used for eligible payroll costs, and no more than 25 percent was used for the other Loan Uses described above.
Example: If a small business seeks 100% forgiveness on a loan for $50,000, at least $37,500 must be for payroll costs during the 8-week period following disbursement of the loan. No more than $12,500 may be for the other Loan Uses described above.
- Staffing and pay levels must be maintained during the 8-week period immediately following disbursement of the loan (see below).
What is the period within which I must spend my loan proceeds to obtain full loan forgiveness?
To obtain full forgiveness, loan proceeds must be spent during the 8-week period immediately following disbursement of the loan (the Covered Period). If you pay your employees on a biweekly or more frequent schedule, you may choose to begin the period on the first day of the first pay period following disbursement of the loan (“Alternative Payroll Covered Period”) for qualifying payroll costs only.
What Payroll Costs can be deducted for loan forgiveness?
The SBA’s guidance allows a PPP borrower to deduct payroll costs “paid” or “incurred” during the borrower’s eight-week Covered Period (or an Alternate Payroll Covered Period).
When are payroll costs considered paid?
Payroll costs are considered paid on the day that paychecks are distributed or that the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee earned pay. This distinction allows employers some flexibility in timing their use of PPP funds.
EG: Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if the borrower pays them by its next regular payroll date. Otherwise, the SBA’s guidance requires that payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period) to qualify.
What is an Alternate Payroll Covered Period?
The SBA provides for an Alternative Payroll Covered Period that caters to borrowers with a biweekly (or more frequent) payroll schedule, allowing them to elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the disbursement of PPP proceeds. Borrowers who opt for the Alternative Payroll Covered Period are still required to use the standard Covered Period for other costs.
What is considered Cash Compensation for loan forgiveness?
Under the SBA’s guidance, the total amount of cash compensation that is eligible for forgiveness for each individual employee cannot exceed an annual salary of $100,000, as prorated for the Covered Period; that is, it cannot exceed $15,385. For these purposes, “cash compensation” includes the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.
What is considered Non-Cash Compensation for loan forgiveness?
Non-cash compensation includes the following and is NOT subject to the prorated limit discussed above:
- The total amount paid by the borrower for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees.
- The total amount paid by the borrower for employer contributions to employee retirement plans, but excluding any pre-tax or after-tax contributions by employees.
- The total amount paid by the borrower for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax), but not including any taxes withheld from employee earnings.
What about compensation to owners?
The SBA’s guidance allows for the forgiveness of amounts paid to owners (e.g., owner-employees, a self-employed individual, or general partner). The amount eligible for forgiveness is capped at the lower of (1) $15,385 (the eight-week equivalent of $100,000 per year) for each individual or (2) the eight-week equivalent of the owner’s applicable compensation in 2019, whichever is lower.
What other non payroll costs are eligible for loan forgiveness?
Covered Mortgage Obligations. The amount of business mortgage interest payments during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020. The guidance defines “business mortgage interest payments” as payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property that was incurred before February 15, 2020.
Covered Rent Obligations. The amount of business rent or lease payments for real or personal property during the Covered Period pursuant to lease agreements that were in force before February 15, 2020.
Covered Utility Payments. The amount of business utility payments during the Covered Period for business utilities for which service began before February 15, 2020. The guidance defines “business utility payments” as business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Can we pay for non payroll costs in advance and they be eligible for forgiveness?
The SBA’s guidance further provides that an eligible non-payroll cost must either be (1) “paid” or (2) “incurred” during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Moreover, the SBA provides that eligible non-payroll costs cannot be more than 25% of the total forgiveness amount.
Can businesses provide raises or bonuses to their employees over the 8-week window and will that be considered payroll and thus forgiven?
If people are hired during the 8-week period, yes they would count against payroll and the forgiveness calculation at a maximum of $100K per person on an annualized basis. Bonuses should be in the normal course of business and overall reasonable.
If you have a deferral for rent or interest, can you take that deferral as an expense and apply that expense to non-payroll costs even though there is no cash outflow? If you have a deferral for rent or interest, can you take that deferral as an expense and apply that expense to non-payroll costs even though there is no cash outflow?
We believe so. You are not allowed to pre-pay any expenses, but catching up on rent is not expressly prohibited in the CARES Act or guidance. To be clear, however, you need to pay the rent during the 8-week period. For example, if you deferred your March rent and you then pay it in May, during the 8-week period; we believe that “catch-up” payments would be allowed (subject to the 75/25 split). Pre-payments do not seem to be allowable.
Can we use the money to pay Q1 payroll taxes and have it considered for forgiveness?
Employer portion of FICA and FUTA is not considered payroll. The payroll definition includes the gross payroll of the employee (which inherently includes the employee portion of FICA). So any payroll taxes would need to be only the employee portion. Employer SUTA would also be includable as a payroll expense if paid during the 8-week period.
What if your pay periods don’t fall nicely into the 8-week time period? For example, we pay semi-monthly, and depending on when the loan is funded, we could have a pay date fall right after the end of the 8 weeks, even though employees would be paid for work/time during the 8 weeks. How does your payroll being paid semi-monthly (15th and 30th) complicate the 8 weeks of wages amount to use in your calculation depending on the funding date?
Unfortunately, it appears that the CARES Act looks at this on a “cash basis,” and it will be dependent on when those payrolls are paid within the 8-week period. You could consider working with your bank to defer funding for a few days as that should help with the timing.
What is considered a utility payment – cell phones, internet, landlines? Would this also include cell phones? For forgiveness purposes, is the cost of internet service considered a utility payment?
Utility payments include electricity, gas, water, transportation, telephone and internet, and would be considered an eligible expense for debt forgiveness.
As the owner of an S Corp who took a $50k W-2 in 2019, can I “give myself a raise” to use up the 2.5x monthly salary amount to have the entire loan forgiven (assume no rent/utilities for simplicity)?
The CARES Act and guidance does not explicitly say you cannot, but we would caution against practices that are not consistent with prior practices to simply “use up” the funds and increase forgiveness, particularly if they do not have a reasonable business justification.
What happens to the loan if I laid-off employees receiving that extra $600/week on unemployment insurance refuse to return to work when they are offered their jobs back?
The SBA and Treasury plan to issue a new rule excluding laid-off employees whom the borrower offers to rehire (for the same salary/wages/hours) from the loan forgiveness reduction calculation.
In other words, an employer will not lose PPP loan forgiveness if they make a good-faith, written offer to rehire a laid-off employee and have documented evidence of being turned down by the employee. Instead the borrower can exclude the employee from the loan-forgiveness reduction calculation required under the Act.
What are the calculations used to determine reduction of loan forgiveness eligibility?
Average number of FTEs/month employed by the borrower from 2/15/19 to 6/30/19 or
Average number of FTEs/month employed by the borrower from 1/1/20 to 2/29/20
Restoring employee full time equivalent levels and salary/hourly levels by June 30, 2020 will assist you in maximizing the amount of your loan eligible for forgiveness.
How do I estimate my PPP loan forgiveness?
There are many factors that must be used to estimate your loan forgiveness. We have created a loan forgiveness estimator to assist you with understanding how much of your PPP loan may be forgiven.
What are the factors used to determine loan forgiveness? I thought is was 100% of payroll and 25% of non cash expenses (like rent, utilities, etc)?
Guidance is still forthcoming but we know that 75% of the loan must be used for payroll costs. The amount of the loan that can be forgiven is further reduced proportionately based on the difference between FTEs and wages paid levels during the covered period and the number of FTE and wages paid during a look back period. Then the amount of loan forgiveness attributable to non-payroll costs is limited to 25% of the loan forgiveness amount.
What are the calculations used to determine reduction of loan forgiveness eligibility?
If an employer reduces the number of FTEs during the covered period, then the amount of loan forgiveness eligibility will be reduced proportionately. The following formulas will be used based on reductions in the number of FTEs:
- Average number of FTEs per month employed by the borrower during the covered period divided by either the:
- Average number of FTEs/month employed by the borrower from 2/15/19 to 6/30/19 or
- Average number of FTEs/month employed by the borrower from 1/1/20 to 2/29/20
- Average number of FTEs per month employed by the borrower during the covered period divided by either the:
How is the FTE count per month determined?
The average number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month.
Is there an advantage to hiring more employees now that we have the PPP loan?
Forgiveness is based on the employer maintaining or quickly rehiring and maintaining wages paid. Forgiveness will be reduced if FTEs declines or if salaries and wages decrease during the covered period. If FTEs and/or wages paid decline, you’ll owe some money back. The same is true if salaries and wages decrease more than 25% for any employee making under $100,000.
What is the definition of a FTE?
According to the Schedule A worksheet in Form 3508, a borrower must, for each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth. No one may be counted as more than 1 FTE. A borrower may, if it elects to do so, use a simplified method and simply ascribe 1.0 for each employee who works 40 hours or more per week and a .5 for each employee who works less than 40 hours per week.
Will a borrower need to repay all or a portion of the PPP loan amount borrowed even if it applies for loan forgiveness?
Yes, unless the borrower meets one or both of the safe harbors for loan forgiveness reduction, it is possible that all or a portion of the loan amount will not be forgiven if the borrower has 1) reduced the salary/hourly wages (by more than 25 percent) of any employee who made $100,000 or less in any pay period in 2019 or was not employed by the borrower in 2019 or 2) reduced its average weekly number of FTE employees.
What are the Safe Harbors from Loan Forgiveness Reduction?
This safe harbor is determined on an individual employee level for each employee. 1) who received compensation at an annualized rate of less than or equal to $100,000 for all pay periods of 2019 or were not employed by the borrower in 2019 and 2) whose salary/hourly wage was reduced by more than 25% during the Covered Period or the Alternate Payroll Covered Period compared to the period of January 1, 2020 to March 31, 2020.
Must an employer request forgiveness of the loan from the lender?
Yes, you must request written request of loan forgiveness from the lender. You will do so by completing form 3508.
Who do I submit my loan forgiveness documentation to?
A request should be made to the lender servicing the loan.
How long will it take to know if the loan is forgiven?
The lender must make a decision on forgiveness within 60 days. Loan payments will be deferred for a minimum of six months in the event you do have to pay on the loan. Interest will accrue during this time.
What if expenses turn out to be lower than the amount of the loan?
Any amount of the loan that is not forgiven must be repaid. There are no prepayment penalties.
Is the corporation taxed on the full amount of the loan they receive?
On April 30,2020, the IRS issued Notice 2020-32 to address the deductibility of loan amounts received under the PPP. In summary, the IRS stated no tax deduction will be allowed for expenses paid with PPP loan proceeds to the extent such amounts are forgiven under the terms of the CARES Act.
In other words, the tax consequences to a loan recipient will be the same as if the PPP loan amounts received were included in gross income and subject to tax.
What are the tax consequences of the notice?
The disallowance of a deduction of Covered Expenses reduces the tax benefit available to PPP loan recipients. In some cases, a prospective loan recipient may be in a better financial position if it does not obtain a PPP loan.
Can you provide some examples?
Example 1 – Net Benefit. Consider a corporate loan recipient that will pay $1 million in employee payroll costs regardless of whether it receives a PPP loan. The recipient obtains a $1 million PPP loan, and uses the loan to pay $1 million in payroll costs that qualify as Covered Expenses. The loan is fully forgiven. Before the Notice, the recipient does not have any additional taxable income from the loan proceeds and has a net benefit of $1 million. After the Notice, the recipient has in effect an additional $1 million in taxable income, producing a federal tax bill of $210,000. For this employer, the PPP loan still produces a net benefit after the Notice in the amount of $790,000.
Example 2 – Break Even. Consider the same facts as in Example 1, except the loan recipient will not pay employee payroll costs unless it receives a PPP loan. For this employer, there will be no financial benefit in obtaining a PPP loan. If the employer does not receive a PPP loan it will furlough, or lay-off, employees and avoid payroll costs, which results in no tax impact. Under the Notice, the receipt of a $1 million PPP loan will similarly have no tax impact on the employer. The PPP loan is excluded from gross income and the Covered Expenses may not be deducted. Before the Notice, the employer would receive a net benefit equal to the amount of its deduction—$1 million. This employer will want to weigh the additional costs of obtaining a PPP loan (e.g., time spent on application, attorneys’ fees and risk of audit) against the benefit of retaining employees.
Example 3 – Loss. Consider the same facts as in Example 2, except the loan recipient uses over 25% of the loan proceeds for non-Covered Expenses. In this case, the employer will be out-of-pocket for the non-Covered expenses. The amounts used for Covered Expenses will not be deductible, and result in no tax impact to employer. The employer will then have to repay the portion used for non-Covered Expenses. In this scenario, the employer is better off if it does not obtain a PPP loan. Before the Notice, the employer would have the added tax benefit of the Covered Expense deduction to help offset costs of loan repayment.
Example 4 – Pass-Through Entities. Pass-through entities face significant tax consequences after the Notice. Consider an S-corporation that receives a $1 million PPP loan. The S-corporation has 10 shareholders, each of which receive a salary of $100,000. Each shareholder is subject to a 40-percent income tax rate (including both federal and state). After the Notice, the S-corporation receives no deduction for payroll expenses at the entity level. Because an S-corporation is a flow-through entity, the disallowance of deductions results in an additional 40-percent tax on the $1 million. Based on the 40-percent income tax rate and 40-percent effective tax due to disallowance of deductions, the S-corporation will only have a net benefit of $200,000.
What has not been answered under the new guidance?
- Are bonuses able to be counted as cash compensation?
- What is the deadline for submission of the PPP Loan Forgiveness Application?
- What if the borrower’s business was subject to local orders that required it to be closed and the borrower was not able to pay its employees during the Covered Period or the Alternative Payroll Covered Period?
- How does one compare employee salary/hourly wages and calculate FTEs if a borrower is acquired during its chosen covered period?
- What type of transportation, telephone or internet access payments qualify as a covered utility for purposes of loan forgiveness?
- Are mortgage obligations only those obligations evidencing indebtedness used specifically to finance the purchase of real (i.e., a warehouse) or personal (i.e., an automobile) property, or do they also include obligations secured by the borrower’s real or personal property where the use of the proceeds of such debt was not limited to such purchase (i.e., for a new acquisition or working capital)?
- How do the Salary/Hourly Wage Reduction Safe Harbor and the FTE Reduction Safe Harbor work when the June 30, 2020, safe harbor date is during a borrower’s Covered Period or Alternative Payroll Covered Period?
What is the Employee Retention Credit and how do we get it?
The CARES Act contains a business relief provision known as the employee retention credit. This is a refundable payroll tax credit for “qualified wages” paid to retained employees between March 13, 2020 and December 31, 2020.
The purpose of this provision is to encourage employers to keep employees on the payroll, even if they are not working during the covered period due to the effects of the COVID-19 outbreak.
What credit is available under the Employee Retention Credit?
The ERC provides an up to $5,000 refundable credit for each full-time employee you retain between 3/13/20 and 12/31/20.
What are the key takeaways I need to know to obtain the Employee Retention Credit?
- You qualify as an employer if you were ordered to fully or partially shut down or if your gross receipts fell below 50% of the same quarter in 2019
- You can claim your credit immediately by reducing payroll taxes sent to the IRS.
- If your credits exceed payroll taxes, you can request a direct refund from the IRS.
- You should compare this credit with PPP since you can’t take advantage of both—but since PPP applications are suspended pending additional funding, look at this especially carefully.
How do I qualify as an eligible employer for the Employee Retention Credit?
In order to qualify to receive this credit you must carry on a trade or business in 2020 and either have had to:
- Fully or partially suspend business operations during any calendar quarter in 2020 due to orders from a government authority; or
- Experienced a “significant decline in gross receipts” during a calendar quarter equal to less than 50% of gross receipts in the same quarter in 2019
For example, if you own a restaurant that is ordered closed to sit-down customers but allowed to continue carryout, drive-thru, or delivery operations, that qualifies you for the credit based on a coronavirus-related partial shutdown. You are qualified for any quarter during which the government order applied—up to four quarters in 2020.
How do I determine the number of full-time employees I count for the credit?
The number of full-time employees you averaged in 2019 determines which employees you can claim for the credit. If you averaged more than 100 full-time employees, only wages for those you retain who are not working can be claimed. If you employed 100 or fewer workers, you can claim wages for all employee whether they are working or not.
Are individuals making more than $100,000 threshold counted toward the FTEE count?
There was some confusion as to what the $100,000 threshold applied to. All employees, regardless of their salary levels, are included for the FTEE count.
Can I take both the Employee Retention Credit and the PPP?
Both the Employee Retention Credit and the Paycheck Protection Program (PPP) provide financial relief to businesses that retain employees. Unfortunately, you can’t take advantage of both. You have to choose.
You will want to determine which program provides the most economic support for you and your employees.
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The content provided has been prepared from various sources and is for informational purposes only and does not constitute legal advice. We hope you find the information useful. The information should not be used to act upon without first seeking appropriate legal counsel.