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Loan Forgiveness and Employee Retention Tax Credits

Posted by Alita Stratton, CPA on May 19, 2020 1:27:39 PM

The $2 trillion CARES Act signed into law March 27, 2020 provides a number of business loans and tax incentives to help struggling businesses. The loan forgiveness program and the employee retention tax each offer advantages to small businesses but cannot be used together. Which program is right for you?

Loan Forgiveness Program

In our recent blog, we outlined details in the $2 trillion CARES Act signed that assist small business owners. Congress approved $349 billion in paycheck protection loans (PPLs) to help businesses cover their operating expenses during the crisis. Small businesses with up to 500 employees can be eligible for forgivable loans based on meeting certain conditions. As a recap, borrowers must have been in business by February 15, 2020 with employees on payroll. PPLs can be forgiven if the employer doesn’t lay off or reduce the salaries of employees during the downturn by more than 25% within eight weeks of the first PPL disbursement.

However, there is another incentive included in the CARES Act for employers of all sizes that retain employees – but that haven’t taken out a PPL.

Related Recorded Webinar: A Cost-Benefit Approach to PPP Loan Forgiveness 

Employee Retention Tax Credit

The CARES Act includes fully refundable Employee Retention Tax Credits equal to 50% of qualified wages paid in a calendar quarter with a maximum of up to $10,000 per employee (including qualified health plan expenses).  The maximum credit is $5,000 ($10,000 qualified wages x 50%) per quarter per employee.

If you meet the requirements, your business is entitled to a credit for each quarter until your business has receipts in excess of 80% of what they were for the same quarter they were last year. Quarterly calculations for the employee retention tax credit are complicated, and the program is limited to wages paid after March 12, 2020 through December 31, 2020.

Unlike forgivable PPLs, which are limited to companies with 500 and fewer employees, employee retention credits are for all employers – but not to a business that has taken out a PPL.

Delay of Payment of Employer Payroll Tax & Self-Employment Tax

The CARES Act allows all employers to defer payment of the employer portion of the Social Security taxes (6.2% of wages) that are otherwise owed for wage payments after March 12, 2020 through December 31, 2020.  The payroll tax deferral amounts to an interest-free loan where 50% is repaid on December 31, 2021, with the remaining balance deferred until December 31, 2022. 

Delay of payment of Employer Payroll tax is not available to a business that has taken out a PPL.

Which Program is Right for You?

Again, small business owners who want to take advantage of the PPL loan forgiveness program cannot also participate in the delayed payroll tax provisions outlined above. Bear in mind that the SBA won’t know if a business qualifies for the forgivable loan until it can prove it has met the employee retention requirement through June 30, 20202 and spent funds on eligible expenses. In the meantime, your business can take a payroll tax deferral, so you should weigh your options carefully with your tax advisor.

COVID-19 Resources and Planning Services

Congress is currently deliberating an additional $250 billion to small businesses loan funding. GPP will keep you posted through our COVID-19 Business Assistance and Resource Center. If your small business needs loan assistance during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.

For immediate questions, email CARETEAM@GPPcpa.com

Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.