Stop and think – before asking for forgiveness on a PPP loan



The Payroll Protection Program (PPP) officially closed for new applications at the end of May after billions of non-repayable loans to needy small businesses across the country. Most of these businesses used the money to pay their employees and other operating expenses as they navigated the unprecedented economic recession caused by the pandemic and related government shutdowns.

But PPP is a loan that can be forgiven, and now many small business owners have begun the process of asking for forgiveness from their creditors. But wait … should they?

May be. But there is another option to consider: instead of determining payroll costs for a loan forgiveness, a small business owner can instead use the same funds to apply for another incentive benefit: Employee Retention Tax Credit or ERTC. This can lead to even greater government cash back and greater overall savings.

To be eligible for ERTC, a business must be shut down in whole or in part by government order – for example, sending employees home to work – during the first three quarters of 2020 or any quarter of 2021. Or a business can prove that its revenue losses were more than 50 percent in any quarter of 2020, or just 20 percent in any quarter of 2021, compared to the same period before the pandemic in 2019.

If those qualification requirements are fulfilled, then ERTC can provide a giant tax credit to the business owner.

Thanks to the American Rescue Plan Act and other growth stimulus bills before it, the loan can be up to $ 5,000 per worker per year in 2020 for skilled wages paid from March 13 to December 31, 2020. up to $ 28,000 per employee per year. Certain start-ups – those created after February 15, 2020 and forced to close due to a government order – may also be eligible for loans of up to $ 50,000 per employee per quarter.

“This is a great opportunity to invest in their business,” says Tom Hammond, vice president of the human resources giant. Paychex He speaks. “The ROI to our customers is significant.”

ERTC is deducted from employer’s payroll taxes on their quarterly tax returns, so almost all employers, even non-profit organizations, can take advantage of this benefit. More importantly, the loan is repayable, which means that if it exceeds the taxes owed, the employer can get the money back in cash. And most importantly, a small business that has not yet taken advantage of a loan for 2020 or 2021 must return by April 15, 2025 and amend the previous payroll tax return.

So why not take advantage of both PPP and ERTC? You can. But you cannot use the same payroll dollars to apply for PPP forgiveness and apply to ERTC. This is an interesting solution for small business owners who have received a PPP loan.

If you do not apply for forgiveness on the PPP loan, you must return the money to the government. The term is five years, but the interest rate is only 1%. Another cost to consider is taxes. Forgiveness PPPs are not taxable for federal tax purposes in Pennsylvania and New Jersey. But tax breaks like the ERTC will reduce the employer’s payroll costs, which will actually increase the bottom line and therefore the income taxes that the company owes.

So what to do? Accountants and financial advisors advise their clients to consider both approaches carefully.

For example, Stephen Slade, partner at a CPA firm WouchMaloney Philadelphia doesn’t think giving up a PPP to create a loan that needs to be paid back makes sense for some of its clients. Slade says his firm is advising eligible clients to take advantage of the 2020 ERTC and then use the remaining wage dollars to cut the PPP loan. “Many of our clients have found ways to maximize both ERTC and PPP so that they can save 100 percent of PPP funds when applying for ERC loans on other payrolls,” he says.

Mitch Gerstein, Senior Tax Advisor at Isdaner and Company in Bala Cynwyd agrees that focusing only on ERTC and failing to repay a PPP loan may not be the best strategy for some businesses. “It really depends on factors such as their cash flow, the size of the loan and the net savings, if any, given the potential tax implications of using the loans,” he says. “There are a lot of moving parts.”

But Paychex’s Hammond says there is a real opportunity to use one or the other. “We are working with our clients to model the potential impact of applying the 2020 and 2021 applicable wages primarily to ERTC and the rest to PPP forgiveness,” he says.

In the end, experts strongly advise small businesses to consult with their financial advisors or payroll services and check the numbers. It is possible that abandoning PPP forgiveness rather than taking full advantage of ERTC’s might be the right move for some.

“The main thing is to attract experts who can analyze the break-even points,” says Slade.

Gene Marks is a Certified Accountant and owner of the Marks Group, a technology and financial management consultancy in Bala Sinwid.


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