Before Taking a PPP Loan, First Consider the Employee Retention Credit

As businesses rush to apply for Paycheck Protection Program loans (PPP Loans) on a first-come, first-serve basis under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act (H.R. 748) signed into law on March 27, each business should consider another alternative provided under the act called the employee retention credits (the credits). A business may choose either a PPP loan or the credits, not both. If a business takes the credits and obtains a PPP loan, the credits are recaptured and must be repaid to the Internal Revenue Service. The question each business should ask itself is, “What will provide the most economic benefits, a PPP loan or the credits?” The answer is not so obvious.

PPP Loan and Its Forgiveness Component

Among many other provisions in the act was the creation of PPP Loans. A PPP Loan is 100% guaranteed by the U.S. Small Business Administration and is designed to assist businesses with fewer than 500 employees (a small business) impacted by the COVID-19 pandemic by providing immediate liquidity to fund a small business’ payroll costs, health insurance, salaries, mortgage payments, rent and utilities for two and a half months. A PPP loan will have a term of two years and a 1% interest rate. Seventy-five percent of the PPP Loan proceeds must be used by the small business to fund payroll costs and the remaining 25% of the PPP loan proceeds must be used to fund overhead costs (insurance, salaries, mortgage payments, rent and utilities). If a small business spends the PPP Loan proceeds within eight weeks of receipt in accordance with this 75:25 ratio and does not reduce its workforce or employee wages during this time, the obligation of such small business to repay the PPP loan is forgiven. If a small business does not adhere to this 75:25 ratio or reduces its workforce or employee wages, then a portion of the PPP loan will not be forgiven and the small business will be required to repay such portion. The act further provides that any portion of a PPP loan that is forgiven is excluded from the small business’ gross income for federal income tax purposes.