On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act provides several forms of financial relief to businesses, including a small business loan program and an employee retention credit. However, because employers are prohibited from exploiting both of these programs concurrently, some must choose which of the two relief provisions is most advantageous for their business. This is particularly relevant for businesses considering funding under the Paycheck Protection Program and Health Care Enhancement Act (the PPP Act), which was enacted on April 24, 2020 and reopened the application process starting on April 27, 2020.
Small Business Loan Program
The CARES Act and PPP Act establish a new small business loan program, which allows the Small Business Administration (SBA) to provide 100% federally backed loans to help eligible businesses pay certain operational costs like payroll, rent, health benefits, insurance premiums, and utilities (the SBL Program).
Under the SBL Program, taxpayers can borrow the lesser of (i) 2.5 times their monthly payroll expense and (ii) $10 million. Borrowers can qualify for automatic loan forgiveness with respect to the loan proceeds utilized to fund payroll costs, mortgage interest payments, rent, and utility payments over the first eight weeks. Forgiveness amounts are reduced for certain employee cuts or reductions in wages; however, these forgiveness reduction penalties may be clawed back for employers who rehire employees or make up for wage reductions by June 30, 2020. Additionally, loan forgiveness cannot exceed 133% of payroll costs. Any forgiven debt amounts that would otherwise be includible in gross income will be excluded for U.S. federal income tax purposes.
Taxpayers eligible to receive a loan under the SBL Program include (i) businesses that do not employ more than the greater of (a) 500 employees, including full-time and part-time, and (b) if applicable, the size standard in the number of employees established by the SBA for the industry in which the entity operates; (ii) businesses in the hospitality and dining industries with more than one physical location, each of which employs 500 or fewer employees; and (iii) self-employed individuals and independent contractors.
Employee Retention Credit
The CARES Act also provides employers with a refundable payroll tax credit equal to 50% of up to $10,000 in wages paid to each eligible employee from March 13, 2020 through December 31, 2020.
The employee retention credit is available to employers, including nonprofits (i) whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings, or (ii) that have experienced a greater than 50% reduction in quarterly receipts. Businesses with 100 or fewer employees may claim a payroll tax credit for eligible wages paid to all employees. For employers with more than 100 employees, only wages of employees who are furloughed or face reduced hours are creditable. Self-employed individuals are not eligible for the employee retention credit.
The employee retention credit is not available to borrowers that receive loans under the SBL Program. Wages credited through the work opportunity tax credit under Internal Revenue Code section 51 are also excluded from the employee retention credit calculation.
Taxpayers can claim the employee retention credit against their quarterly payroll tax liability, and should be able to claim the employee retention credit and receive a refund (if applicable) prior to filing of their 2020 tax returns. The Internal Revenue Service is expected to provide further guidance on the process for claiming the credit.
Which Program is Best for Your Business?
Since employers that obtain a small business loan under the SBL Program are not eligible for the employee retention credit, taxpayers should weigh the eligibility requirements and financial benefits of each program to determine which will be most suitable based on current business needs. Preliminary analysis suggests that employers eligible for both the SBL Program and the employee retention credit will generally receive more benefit from the SBL Program, provided that a significant portion of the loan is utilized to fund operating expenses such as payroll, rent, and utilities. Note that taxpayers must affirmatively opt out of the employee retention credit, so those who wish to borrow under the SBL Program should ensure such election is made.
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How Can Venable Help?
The taxpayer relief programs established by the CARES Act are complex in both their application and their interaction with existing legislation. Venable's international tax team can help clients determine in a timely manner whether they qualify for specific programs and analyze which relief opportunities would provide the most benefit based on their unique business profiles.