The Paycheck Protection Program and Employee Retention Tax Credits

This post was updated on July 8, 2020. 

On Friday, March 27, 2020, the U.S. federal government signed the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”) into law, providing vital relief to both individuals and businesses that have experienced economic hardship as a result of the COVID-19 crisis. Faced with the possibility of defaulting on rental contracts and bills and even shutting their doors, restaurant owners and operators could benefit significantly from the stimulus package. 

We’ve highlighted here two parts of the CARES Act that we think could be particularly beneficial for the restaurant community: the Paycheck Protection Program and the Employee Retention Tax Credits. Because a small business can’t get a Paycheck Protection Loan and also claim an Employee Retention Tax Credit, it is important to compare the two while considering the current financial needs of your business. 

DISCLAIMER: This article is for informational purposes only and is not legal advice. If you have specific legal or tax questions, you should consult your attorney or tax advisor, as appropriate. Toast is not affiliated with the United States Small Business Administration (“SBA”), and does not act as a lender or referral agent for SBA lenders. SBA loan programs are subject to eligibility. Please consult with a counselor for the SBA or a licensed SBA lender for additional information.

And just so you know, information about the CARES Act is rapidly emerging, with new information coming out every day. This information is up to date as of the date at the top. We will do our best to provide you with updated information as it becomes available to us.

Understanding The Paycheck Protection Program (PPP)

A core part of the CARES Act is the Paycheck Protection Program (PPP), which provides eligible small businesses with access to 100% federally guaranteed loans called Paycheck Protection Loans (PPLs). Of note, the Paycheck Protection Program exhausted its initial $349B in funds on April 16th, however, on April 24th, the U.S. federal government signed into law a bill approving an additional $310B for PPLs.

Update: On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law that provides businesses with more flexibility in qualifying for forgiveness on their PPLs. We've incorporated changes made through the Flexibility Act in this post. Another recent update is that initially the deadline to apply for a PPL was June 30th, 2020, but now small businesses have until August 8th, 2020 to apply.

The Paycheck Protection Program allows small businesses to access 2.5 times their average monthly payroll expenses, subject to a cap of $10M. PPLs received on or after June 5, 2020 have a five-year maturity. PPLs received before June 5, 2020 have a two-year maturity, unless the business and lender mutually agree to extend the term to five-years. The interest rate on PPLs is 1%, deferred until the forgiveness decision is determined, with no collateral or personal guarantees required. 

A PPL loan can be used for:

• Payroll costs 

• Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums

• Payments of interest on the restaurant’s mortgage obligation

• Rent payments

• Utility payments

• Interest on any other debt obligations that were incurred before February 15, 2020

• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

The loan is eligible to be forgiven if used for eligible payroll costs, rent, interest on a mortgage, or utilities within 24 weeks of disbursement.  If a business received PPP funds prior to June 5, 2020, they can elect an 8-week period to use the PPP funds. Up to 40% of PPP funds can be used for non-payroll costs (up from 25% through the Flexibility Act) and still be eligible for forgiveness. 

You can think of a PPL as a way for the government to subsidize payroll, as well as some essential expenses such as rent, for 24 weeks. The amount forgiven will be reduced if the business has fewer employees compared to the prior year or wages for employees are reduced by more than 25%. Businesses have until December 31, 2020 (previously they had until June 30, 2020) to rehire staff and return wages to at least 75% of what they were from January 1 to March 31, 2020 to maximize the forgiven amount. 

More information on the Paycheck Protection Program can be found on the SBA's PPP website, including a FAQ, link to the PPP application and a list of lenders participating in the Program. 

Applications and instructions on how to apply for PPL forgiveness can be found on the SBA website. Businesses that meet the criteria below may apply for forgiveness using the Paycheck Protection Program EZ Loan Forgiveness Application.

• Are self-employed and have no employees; OR
• Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
• Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%

Understanding the Employee Retention Tax Credit 2020

The CARES Act also provisions for small businesses to claim tax credits, called Employee Retention Tax Credits, to encourage businesses to keep employees on their payroll throughout the COVID-19 crisis.

The credit allows businesses to take a reimbursed tax credit of up to 50% of the first $10K in qualified wages for each employee. Wages must have been paid after March 12, 2020 and before January 1, 2021. This $10K limit applies to wages that an employee earns over the course of all calendar quarters and the credit applies to Social Security Payroll and Railroad Retirement Tax Act taxes. 

One of the most beneficial elements of this tax benefit is that it applies to almost all types of businesses, regardless of size, including tax-exempt organizations. The only individuals who are not able to take advantage of this credit are state and local governmental entities, and any businesses who receives a SBA loan.

To be eligible, an employer must have been in business during 2020 and have had partial or full suspension of their business activity due to shut-down orders by their applicable jurisdiction; or in a 2019/2020 calendar quarter comparison, starting with the first quarter of 2020, have experienced less than a 50% reduction in gross receipts as compared to gross receipts from the first quarter of 2019, until the end of any applicable subsequent calendar quarter comparisons where an employer’s gross receipts are greater than 80% in comparison to the same calendar quarter in the prior year.

More details on the Employee Retention Credit program can be found in our On the Line post dedicated to the Employee Retention Credit or on the IRS FAQ on the Employee Retention Tax Credit. 

Employee Retention Tax Credit vs. Paycheck Protection Program

There unfortunately isn’t a “one size fits all” answer to the question of whether a PPL or Employee Retention Tax Credit is better for your business.

As a busy business owner, the time it takes to get access to the relief options can be a consideration. A PPL requires an application process (and in a lot of cases, working with a bank that you have a preexisting relationship with), while employers can get immediate access to the Employee Retention Tax Credit by reducing employee tax deposits they are otherwise required to make. 

Consider also the amount available for relief from a PPL vs. the tax credit and the number employees your business has:

• How much are you eligible for in employee retention tax credit? 

• How much would you spend on eligible payroll expenses in the eight weeks from when you get the loan? Will eligible payroll expenses account for 60% of the loan amount? If not, are you willing to pay 1% interest to fund the PPL and do you have an eligible use for the proceeds?

• Number of employees. If a business had 100 or fewer employees on average in 2019, then the Employee Retention Tax Credit is based on wages paid to all employees, regardless of whether they actually worked or not. If a business has more than 100 employees on average in2019, then the Employee Retention Tax Credit is allowed only for the wages paid to employees who did not work during the calendar quarter.

If your business is laying off or furloughing staff and decides to move forward with a PPL or the tax credit, take into account the following: 

• It is possible the PPL may not be forgiven (in part or in full). 60% of the loan proceeds need to be used for payroll costs in order to be eligible to be forgiven. If a business has fewer employees compared to the prior year, the amount eligible for forgiveness will be reduced. If you’ve already laid off or furloughed staff and have a PPL, consider whether you will have funds to pay the staff after you’ve used up the proceeds from the loan.

• The tax credit can still be claimed against payroll taxes for 50% of the first $10K in qualified wages for each employee, even if they’ve been furloughed or are working partial shifts. For employers who had 100 or fewer full-time employees in 2019, a business can still obtain credit for their employees regardless of whether an employee worked during the crisis. This means that an employer will still receive the credit, regardless of interruptions to the business. For employers who had more than 100 full-time employees in 2019, the credit is applicable only to employees who were not providing services for the employer during the calendar quarter due to COVID-19 prohibitions.

Also worth considering when you’re laying off or furloughing staff are the unemployment benefits they may be eligible for. In some cases, an employee may be better off with the unemployment benefits made possible by the stimulus package. 

What if a business has shut down or partially closed? For businesses that were operating in 2020 and have partially or fully closed due to shut-down orders by their applicable jurisdiction, employee retention tax credits are still available. For a PPL, a small business must have been operational on February 15, 2020, but keep in mind if you shut down or partially close, your loan may not be eligible for forgiveness if 60% of the loan is not spent on payroll costs.

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