The extension of the Paycheck Protection Program (PPP) was a welcome surprise at the end of 2020. Especially some of the provisions, like the deductibility of expenses that PPP1 loan proceeds were used to cover during the initial phases of the pandemic. The legislation passed also included a PPP2 loan program, which is exciting for many business owners that benefited from PPP1. PPP2, however, comes with a caution, discussed in more detail below, that may eliminate many business owners from participating in this second round of government aid. Please note that the SBA will open the second round of PPP loans to everyone on January 19, 2021.
The New Round of the Paycheck Protection Program
In order to qualify for PPP2, businesses must have experienced a 25% decline in sales in any quarter of 2020 compared with the same quarter in 2019 and must have less than 300 employees. This is a slight change from PPP1 where there wasn’t a requirement that sales had slipped and the headcount figure was 500, not 300. Regardless, all of the other franchise indicator code exceptions and other requirements carry over from the original PPP program under the CARES Act.
Similar to the first round of PPP loans, there is a requirement that a business owner certify that the loan is needed due to economic uncertainties that threaten the businesses continuation and ability to keep people employed. This certification may not be as easy to make as it was during the first round of PPP funding. We believe this requirement will be scrutinized more carefully this time around. If your business prospered during 2020 and hasn’t experienced significant losses like we expected would happen when this all started, then we recommend proceeding cautiously with a PPP2 request, even if you can demonstrate your sales were down in a given quarter.
Change to the Employee Retention Tax Credit
One overlooked and significant change in the legislation is regarding the Employee Retention Tax Credit (ERTC). When this credit was first introduced, we all diligently read the legislation and, at the very end, there was a statement that essentially said – “if you’ve received a PPP loan, then you don’t qualify for an ERTC.” Our thought then was…”Why didn’t you say that in the first place?!!!” Well, now those of you that did receive a PPP loan can also potentially qualify for the ERTC. Unfortunately, it’s MUCH more complicated than that, but the credit can be significant, so it’s worth your time figuring it out. The credit is up to $5,000 per employee for the year 2020, has been expanded to the 1st two quarters of 2021, and increased to a maximum credit of $7,000 per employee per quarter through the quarter ending June 30, 2021. That means you could receive up to $14,000 per employee for 2021.
The way to claim the credit is through the payroll tax system. In other words, you’ll reduce the amount of your payroll tax deposit by the amount of the credit you are claiming when remitting payroll taxes. One of the reasons the ERTC is such a big deal is because, if you qualify, there is no need to certify that you need the credit.
We’re expecting (hoping) the IRS will issue additional guidance in the next couple of weeks on this program. If you would like to discuss this further, contact me today. My team can assist with doing an analysis to determine your eligibility. ARB’s PPP Services Group members have been hand-picked, based on knowledge, training, and experience, to deliver advice and sound recommendations.
Check out other ARB business tools and resources, such as our 13-Week Cash Flow Analysis tool and our PPP Loan Forgiveness Workbook. Visit our COVID-19 Financial Resource and Tax Center for information on related matters.
by Bart Haag, CPA
Barton Haag joined ARB in 1996 and has been a principal with the firm since 2005. His career focus is primarily in providing financial accounting, income tax planning, and business advisory services for clients in the automotive and motorcycle dealership industries and for closely-held businesses, many of which are family owned.