By now, numerous versions of how to apply for the Payroll Protection Program (PPP) or Economic Impact Disaster Loan (EIDL) in relation to COVID-19 have been pushed out either in newsletters, emails, or social media.
The purpose of this article is not to explain the technical details, but to stop and think whether a business should apply for the bridge loans like EIDL, PPP, or take the appropriate tax credit from this pandemic. Let’s quickly explain them again.
The Families First Coronavirus Response Act (FFCRA) is a monumental program for small and midsize employers. The FFCRA will provide a 1:1 credit for the cost of providing paid sick and family leave wages to their employees kept on staff related to COVID-19.
Employee Retention Credit (ERC): a refundable credit for qualified businesses equal to 50% up to $10,000 in qualified wages (March 13-March 31) and 50% of qualified wages paid during the 2nd quarter of 2020 on Form 941, 941-SS or 941-PR. This credit is for those employers that had to partially or fully shut down due to governmental orders, also seen as businesses with a significant decline in gross receipts compared to 2019. A great connection the FFCRA has is that the ERC ties into the already existing Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (FMLA). Those wages paid for the EPSLA or FMLA are fully refundable under the ERC.
For sole-proprietors, the IRS has specific provisions to allow for certain tax credits to apply in relation to the above, but the periods in question will be April 1, 2020 through December 31, 2020. This tax credit is instead applied to self-employment tax rather than wages paid to employees.
This program has a neat provision for an advance of $10,000 to provide economic relief to qualified businesses experiencing a temporary loss of revenue due to the effects of COVID-19. Even though the name says “loan,” this advance does not need to be repaid. Funds have been provided in days; a fair turnaround compared to traditional private loans from banks. Ensure the use of these funds qualifies under the act, but more can be available under the EIDL if necessary. Just understand the loan provisions to pay it back.
This program allows for 2.5x the average monthly gross wages paid during 2019 (or the last rolling 12 months or a seasonal average depending on the business). You must also keep the same average number of full time employees (FTEs) determined on February 15, 2020 through June 30, 2020. At least 75% of the funds need to be used for payroll and the other portion to be used for rent/utilities. If not, the excess becomes a loan at 1% due in two years.
Putting It All Together
For small business owners, what does it all mean? Which program is best? How will they receive the most money or best opportunity to survive during this time? This is where professional advice comes in. Sit down with your CPA, banker, or trusted advisor. Discuss with them about the pros and cons of each program to determine how to proceed. It’s also important to note that the tax credits first touted won’t be available for those businesses that take these special loans or grants. No one is talking about that.
A sole-proprietor with a low wage base may just need the advance of the EIDL to cover outstanding business costs. A business that had to completely close down due to the governmental orders may see that they need the PPP to keep their employees from making more during unemployment with that extra $600 flat weekly pay from the CARES Act vs what the business owner was paying them (hence a need to pay them more to incentivize them to stay loyal). Do not just look at these programs as “free money” because the specifics for their use are well defined.
When the first program for businesses came out, the EIDL seemed like a great loan opportunity at the time. Then, the PPP came out, and it seems like a no brainer. A business owner can lean on a financial professional to make the right decision for their business. No one wants to end up owing money they didn’t anticipate or not receiving as much as they needed because they applied for one over the other.
Contact us for support. Lean on your trusted advisors to help navigate you through a not-so-seemingly easy opportunity. We’re here to help.
Derek M Oxford | CFP®️ | AEP®️