Tax Credits, Deferrals or PPP Loans: Which Is Best for My Business?

Tax Credits, Deferrals or PPP Loans: Which Is Best for My Business?

The programs to help businesses survive the COVID-19 pandemic – two tax credits, deferral of employment tax and two SBA loan programs – have left businesses scrambling to decide which one to take. The qualifications for each program are complicated, and there are rules against overlapping benefits. Below we identify some of the benefits and drawbacks of each type of financial assistance and explain the restrictions on getting benefits under more than one program.

Paycheck Protection Program (PPP)

The SBA’s PPP program, although out of money for now, is likely to get additional funding from Congress soon. This program allows small businesses with 500 or fewer employees to take out loans of up to $10 million to retain their employees for eight weeks, between February 15 and June 30.Salaries for individual employees are capped at $100,000 per year; any excess over that cap is not eligible for consideration. The loans are limited based on a formula tied to payroll costs. The loans may be forgiven later if the funds are used for payroll, mortgage interest, rent and utilities. The forgiveness amount may be reduced if the number of employees retained drops below a certain level.

Benefits

Gives employers a lump sum of cash now to maintain operations.

Much of the loan may not have to be paid back if spent 75% on payroll and used to cover mortgage interest, rent and utilities.

Drawbacks

Not available to large employers with more than 500 employees, although exceptions exist for businesses in the restaurant and hotel industry.

Based on the last 12 months of payroll, so businesses that have downsized will qualify for less.

Payback will be judged by what is spent from February 15 through June 30 so payroll should be constant or increasing to avoid having to pay the loan back.

Coordination with Other Programs

Employers who get a PPP loan do not qualify for the employee retention credit.

If an employer receives the sick and family leave credit, the wages covered by that credit are not eligible as “payroll costs” for purposes of receiving loan forgiveness under the PPP program.

SBA Economic Injury Disaster Loans

This program offers low-interest Economic Injury Disaster Loans (EIDL) of up to $2 million to impacted small businesses, with the possibility of getting an immediate advance grant of up to $10,000 (Latest guidance is for $1,000 per employee up to $10,000 per company). The interest rate is 3.75%, and loans can be repaid over 30 years. The loans are available to businesses with 500 or fewer employees and to sole proprietorships and independent contractors. Although funding has been paused, it is likely Congress will authorize additional funds for the program.

Benefits

Loan advance of up to $10,000 does not have to be repaid, even if loan is later denied.

Low-interest with long payment terms.

Personal guarantees waived.

Drawbacks

Loans are not forgivable, except for the grant of up to $10,000.

Not available to large employers, with more than 500 employees, although exceptions exist for businesses in the restaurant and hotel industry.

Coordination with Other Benefits

Businesses can apply for PPP loans, too, but the grant amount received up to the $10,000 maximum will be subtracted from any PPP loan amount.

Employee Retention Credits

Employers whose operations are suspended or whose gross receipts declined from last year get a refundable payroll tax credit for 50% of the first $10,000 in wages paid to employees during the COVID-19 crisis. The credit is allowed for wages paid from March 13, 2020 through December 31, 2020.

Benefits

Credit is available for any size employer, with no limits on number of employees.

The credit is refundable, meaning that if the credit amount exceeds the employer’s FICA tax liability, the government will write a check.

Reduces the employer portion of social security taxes for all employee wages.

Employers can claim credits now by reducing required employment tax deposits.

Credits can be claimed for wages paid for the rest of the year.

Drawbacks

If you get this credit, you cannot get a PPP loan.

Credit is capped at $5,000 per employee.

Credit amounts decrease if employer reduces payroll.

Coordination with Other Benefits

Employers who claim the employee retention credit cannot also receive a PPP loan.

If an employer meets the qualifications for both the sick and family leave credit and the employee retention credit, the employer may receive both credits, but not for the same wages.

An employer may not count employees for the employee retention credit if they are receiving a Work Opportunity Credit for those employees.

Sick and Family Leave Credit

Small and mid-sized employers get a refundable payroll tax credit equal to 100% of the wages paid for mandated sick and family leave. This credit only applies to the category of employers required to provide sick and family leave to their employees–businesses with fewer than 500 employees. The credit is increased by the employer’s contribution to Medicare taxes and by health care expenses allocable to those wages. The credit is available for wages paid from April 1, 2020, through December 31, 2020.

Benefits

Credit offsets mandated sick and family leave.

Employers can claim credits now by reducing required employment tax deposits.

The credit is refundable so if the amount of the leave payments exceed the employer’s social security taxes, the excess will be refunded to the employer.

Credit does not disqualify an employer from participating in the other programs.

Drawbacks

The same wages cannot be claimed for other credits.

Employers with 500 or more employees cannot claim the credit.

Coordination with Other Benefits

If an employer meets the qualifications for both the sick and family leave credit and the employee retention credit, the employer may receive both credits, but not for the same wages.

If an employer receives tax credits for sick and family leave wages, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under the PPP loan program.

Employers cannot claim the existing Sec. 45S credit for family and medical leave for the same wages claimed for the sick and family leave credit. An employer can take the Sec. 45S credit for any additional wages paid.

Employment Tax Deferral

Employers are allowed to defer payment of the 6.2% employer share of Social Security taxes for the rest of 2020. The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required from March 27, 2020 through December 31, 2020. Repayment may be made over two years, with half required to be paid by December 31, 2021 and the other half by December 31, 2022.

Benefits

All employers may defer the deposit and payment of the employer’s share of Social Security tax, regardless of the size of the business.

Gives employers instant cash flow because employment tax deposits can be reduced immediately.

An employer can defer Social Security tax deposits before determining whether the employer is entitled to the paid leave credits, the employee retention credit or refunds for those credits.

Applies to self-employed persons who may defer the payment of 50% of the Social Security tax on net earnings from self-employment income.

Drawbacks

With up to 2-year pay back, new or previous officers and directors could face liability if payroll taxes are not paid back within that time period.

Employer is solely liable for payment of the deferred taxes if the employer directs an agent of certified professional employer organization (PEO) to defer payment.

Coordination with Other Benefits

Employers that received a PPP loan may not defer the deposit of Social Security tax after the employer receives a decision from the lender that the loan was forgiven. Once an employer receives that decision, the employer is no longer eligible for deferral. However, the amount that was previously deferred will continue to be deferred until the 2021 and 2022 due dates.

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