Much of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act limelight has focused on forgivable Paycheck Protection Program (“PPP”) loans; however, many businesses have had to weigh the necessity of such loans and should now consider alternative options provided by the CARES Act such as the refundable payroll tax credit (“Employee Retention Tax Credit” or “Tax Credit”).
The Small Business Administration (“SBA”) and Treasury Department confirmed that PPP loan applicants who repay their loan by the safe harbor deadline of May 14, 2020, are still eligible for the Tax Credit as long as they meet all other requirements.
The Tax Credit creates a refundable credit for 50% of qualified wages between March 13, 2020, and December 31, 2020, capped at $10,000. It allows employers to claim employee wages and qualified health plan expenses up to $5,000 for each full-time employee.
Eligible businesses must operate in the United States and (1) have operations partially or fully disrupted by COVID-19 or (2) have gross receipts decline by more than 50 percent compared to the previous year. Businesses remain eligible for the credits until their gross receipts equal 80% of the historical gross receipts of the same quarter in 2019.
Full or partial disruption of business operations must stem from governmental orders limiting commerce, travel or group meetings. For example, if a business’s suppliers are unable to deliver critical goods due to a COVID-19 governmental order, the impacted business would likely be eligible for the Tax Credit. Alternatively, if a governmental order results in a business’s customers staying home and not buying from that business, that business would not likely be eligible for the Tax Credit. The IRS has not issued clear guidance as to what is considered “full or partial disruption,” so much uncertainty still remains.
Businesses should carefully weigh the benefits of the Tax Credit versus a PPP loan when determining which to use. Further, businesses deciding to repay their PPP loans before the May 14th safe harbor deadline should take advantage of this alternative support option. Because the two options are mutually exclusive, discussing the pros and cons of each CARES Act option along with eligibility requirements is critical for businesses looking to support their operations.