PPP and ERC: The Lifelines for Struggling Businesses Explained

Discover how PPP and ERC can be the lifelines for your struggling business, providing much-needed financial relief and guiding you toward stability and growth.

PPP and ERC: The Lifelines for Struggling Businesses Explained
Photo by Blake Wisz / Unsplash

The Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) are two programs launched by the United States government to assist businesses severely affected by the economic outcome of the COVID-19 pandemic. The PPP, a component of the CARES Act enacted in March 2020, offers loans to small businesses, which can be fully forgiven if used for eligible expenses, primarily payroll. This program aims to help enterprises to keep their workforce employed during these challenging times.

Conversely, the ERC provides a total refundable tax credit for employers. This credit was also established from CARES Act in March 2020. But it has undergone several changes under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021. These acts expanded the ERC's availability and eligibility and increased the maximum credit amount.

Notably, they extended the ERC through December 31, 2021, and allowed businesses receiving PPP loans to claim the ERC. This change significantly enhanced the financial support available for companies navigating the challenges of the pandemic.

Key Differences Between PPP Loan and Employee Retention Credit

While both retention credit and PPP are designed to assist businesses in maintaining their payroll during the COVID-19 pandemic, they differ in several key aspects:

Application Process

Applying for PPP necessitates working with a lender to submit a detailed application, while Employee Retention Credit doesn't involve an application process. Instead, businesses claim the credit on their quarterly employment tax return.

Loan vs. Credit

PPP provides a loan, which can be entirely forgiven if it's used for eligible expenses, mainly payroll. In contrast, Employee Retention Credit offers a refundable tax credit, reducing the taxes a business owes.

Flexibility in the Use of Funds

PPP funds are primarily for payroll costs, although some can be used for rent, utilities, and mortgage interests. With Employee Retention Credit, there are no restrictions on how the funds saved from the tax credit can be used.

Employee Consideration

For PPP, forgiveness is based on retaining or quickly rehiring employees and maintaining salary levels. Employee Retention Credit, however, provides credit for wages paid to employees, irrespective of their employment status in future quarters.

Understanding these differences can help businesses decide which program best meets their needs during these challenging times.

Paycheck Protection Program (PPP) Loan Eligibility

To qualify for the Paycheck Protection Program (PPP), businesses must meet specific eligibility criteria:

  1. The business must be operational as of February 15, 2020.
  2. It should be a small business, as defined by the Small Business Administration (SBA). This could include but is not limited to, sole proprietors, independent contractors, self-employed individuals, private nonprofits, and veterans' organizations.
  3. The business should have 500 or fewer employees unless the industry's SBA size standard allows more.
  4. There should be a necessity for the loan due to current economic uncertainty.
  5. The monies will be used to keep employees, pay payroll, or make mortgage, lease, and utility payments.
  6. The business has yet to receive another PPP loan (for First Draw PPP loans).
  7. The business has used the total amount of its first PPP loan on eligible expenses (for Second Draw PPP loans).

These prerequisites ensure that the PPP loans are directed towards businesses that are the most in need, facilitating their survival during challenging economic times.

Employee Retention Credit (ERC) Eligibility

Businesses must meet specific eligibility criteria for the Employee Retention Credit (ERC):

  1. Employers, including tax-exempt entities, are qualified for the credit if operations were either fully or partially suspended due to a COVID-19-related governmental order, resulting in a significant decline in commerce or gross receipts.
  2. The employer's gross receipts were less than 50% of the comparable quarter of 2019. When an employer's gross receipts exceed 80% of a close quarter in 2019, they are no longer eligible for the credit after that quarter's conclusion.
  3. Eligible employers who receive PPP loans may still qualify for the ERC concerning wages not paid for with forgiven PPP proceeds.
  4. Eligible employers can obtain immediate credit by decreasing the payroll taxes deposit they are otherwise expected to make.
  5. If an employer's employment tax deposits are insufficient to cover the credit, the employer may receive an advance payment from the Internal Revenue Service (IRS).
  6. The ERC is extended through December 31, 2021.

These proposals ensure that the Employee Retention Credit aids enterprises that have suffered extreme economic hardship due to the COVID-19 outbreak.

Can I Apply For ERC Even If I Already Have a PPP Loan?

Businesses can leverage retention credit and PPP. Still, navigating the nuances is imperative to maximize the benefits and stay within the legal boundaries.

Previously, under the original CARES Act, businesses could not take advantage of both PPP and Employee Retention Credit; it was an either/or situation. The Consolidated Appropriations Act of 2021, however, modified this restriction. An eligible employer can benefit from both programs, but a critical caveat is that double dipping is not permitted. This means that PPP and Employee Retention Credit can only cover part of the payroll costs.

Businesses can strategize their approach to make the most of these relief programs. For instance, consider using PPP loan proceeds for payroll costs during the loan-covered period. Once the PPP funds are exhausted, the employer can claim the ERC for remaining qualified wages not paid with pardoned PPP proceeds.

Remember, it requires meticulous record-keeping to ensure that the use of funds from these two programs is distinct. Therefore, it is highly recommended that businesses engaging in both PPP and ERC seek guidance from a tax professional or ERC specialist to ensure compliance with the stipulated regulations.

Furthermore, businesses that received PPP loans in 2020 but still need to claim the ERC may amend payroll tax returns to claim the ERC retroactively, provided the wages were not paid from the forgiven PPP loan.

Understanding these details is crucial as it can increase the financial relief for many businesses navigating through these challenging times.

Benefits of PPP Loan

The Paycheck Protection Program (PPP) brings a multitude of benefits to small businesses, including:

  1. For Small Businesses: PPP is specifically designed for small businesses, making it an accessible funding source for companies struggling to secure loans from traditional lenders.
  2. Loan Forgiveness: One of the most significant advantages of PPP loans is that they can be fully or partially forgiven if used for eligible expenses, primarily payroll, during a specified period.
  3. Low-Interest Rate: PPP loans come with a low-interest rate of 1%, making them an affordable financing option for businesses.
  4. No Collateral or Personal Guarantees Required: Unlike most business loans, PPP loans don't require collateral or personal guarantees, reducing business risk.
  5. Deferred Loan Payments: Businesses that receive a PPP loan can defer payments for a specific period, allowing them to focus on rebuilding without the immediate concern of loan repayment.
  6. Retain Employees: The PPP encourages businesses to retain employees, ensuring job security for many workers during uncertain times.
  7. Cover Non-Payroll Expenses: While the primary purpose of PPP is to cover payroll expenses, a portion of the loan can also be used towards other business-related expenses such as rent and utilities.

Benefits OF Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) also offers numerous advantages for businesses; these include:

  1. Significant Monetary Relief: The ERC credit provides substantial financial relief to businesses. Additionally, in 2021, a company may be eligible to claim up to $7,000 for each employee per quarter.
  2. Encourages Retention: By incentivizing firms to keep employees on the payroll, the ERC helps to maintain employment levels during difficult economic times.
  3. Flexibility: ERC is not a loan and does not need to be repaid, providing businesses greater flexibility in utilizing the funds.
  4. Retroactive Claim: Businesses can claim the ERC credit retroactively for past quarters, allowing firms to recoup costs and improve their financial situation.
  5. Reduction in Tax Liability: As a tax credit, ERC directly reduces a business's tax liability, enhancing the company's profitability.
  6. Immediate Access to Funds: Through advance payments and reduced employment tax deposits, businesses can gain direct access to the funds, which can be critical for managing cash flow.
  7. No Restrictions on Use: Unlike some funding options, there are no specific restrictions on how ERC funds are used within the business, offering greater flexibility to businesses.

What Is PPP Loan Forgiveness?

PPP Loan Forgiveness transforms the loan into a non-taxable grant. This allows businesses to use the funds they receive without the obligation to repay them under certain conditions. The primary intention of this feature is to aid small businesses in maintaining their payroll throughout the COVID-19 pandemic while covering some additional operational expenses.

To be eligible for this forgiveness, businesses must adhere to specific rules. A crucial aspect is that at least 60% of the loan must be explicitly used for payroll costs, including salaries, wages, and benefits. The remaining 40% can cover mortgage interest, rent, or utilities. If the loan is used towards these approved costs, and the employer maintains employee headcount and compensation levels, the PPP loan can be fully forgiven.

The forgiveness process involves applying through the lender that provided the PPP loan. The application must include documentation of the loan's use, including payroll documents, receipts, account statements, and tax filings. To maximize their loan forgiveness, businesses must be accurate and thorough in this process.

It's also important to note that the loan forgiveness process is flexible; businesses must apply for it. Assume a company only requests forgiveness within ten months after the end of the covered period (between 8 and 24 weeks). In that case, PPP loan payments are no longer deferred, and businesses will begin making loan payments to their PPP lender.

The PPP Loan Forgiveness is a significant benefit, but businesses must follow the guidelines to leverage this opportunity fully. Always consult a financial advisor or an ERC specialist when navigating this process.

PPP Loan Forgiveness Deadline

The deadline for PPP loan forgiveness is critical in determining the loan repayment. It's crucial to remember that the clock starts ticking as soon as the PPP lender disburses the funds. For the first draw PPP loans, borrowers can apply for loan forgiveness any time up to the loan's maturity date. However, the borrower only applies for forgiveness within ten months after the last day of the maximum covered period of 24 weeks. In that case, loan payments are no longer deferred, and the borrower must begin making repayments to their lender.

For the second draw PPP loans, the rules are slightly different. The covered period for these loans can be between 8 and 24 weeks at the borrower's discretion. Like the first draw loans, borrowers can apply for forgiveness at any time up to the loan's maturity date. Still, if they do not use it within ten months after the last day of their chosen covered period, they will need to start making repayments to their lender. In both instances, the key is to apply for forgiveness once the documentation has been prepared to give the lender and the SBA sufficient time to process the forgiveness application.

ERC Application Deadline

The application deadline for the Employee Retention Credit (ERC) is critical for businesses seeking to leverage this benefit. The application for the ERC must be filed within three years of the employer's employment tax return due date for the applicable quarter. This rule applies to both 2020 and 2021 ERC claims. Time management is essential as late applications may not be considered, which could mean significant financial loss for businesses.

Moreover, it's also worth noting that the deadline could be extended if there is a disaster declaration for the location of the business of the President. An extension could provide additional time for businesses to prepare and submit their applications wholly and accurately. Companies should always stay abreast of such declarations and consult with a tax professional to ensure that all ERC credit requirements and deadlines are met.

Dates to be remembered:

  • For the 2020 tax year, the Employee Retention Credit deadline is April 15, 2024.
  • For the 2021 tax year, the Employee Retention Credit deadline for quarters one through three is April 15, 2025.

Do you want to learn more about ERC? Head to the ERTC Express website!