The American Rescue Plan Act of 2021 changed the rules on the Paycheck Protection Program (PPP) loans and Employee Retention Credit (ERC). Both programs are available to small businesses that meet the requirements, and each has the potential to positively impact the company. A quick overview of the programs can help any small business decide which is the best option to pursue.
The American Rescue Plan (signed into law March 11, 2021) and the Consolidated Appropriations Act (signed into law on December 27, 2020) made a number of changes to the PPP and ERC. Under the Consolidated Appropriations Act, business owners can now take out a PPP loan and claim the ERC. And, the Paycheck Protection Program Extension Act of 2021 extended the PPP through May 31, 2021.
So, when it comes to a PPP loan vs. Employee Retention Credit, which should you choose?
What is a PPP Loan?
The Payment Protection Program provides forgivable loans to qualifying small businesses to cover payroll and other business expenditures such as utilities or rent for the business’s property.
What is Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit that employers can claim for the qualified wages of their full-time employees that are listed on their federal employment tax returns. The goal of the ERC is to provide relief to businesses so they can cover their workers’ wages and the costs of employee health plan expenses.
Is My Business Eligible for Either?
PPP loans can be provided to businesses that:
- Have 500 or fewer employees (with industry-specific exceptions for more)
- Are a sole proprietorship, contractor, tribal business, etc.
ERC can be applied for under the following conditions
- Employers of a business of any size (not including self-employed)
Eligibility requirements for both PPP and ERC include:
- The business suffered a major, measurable revenue loss during the COVID-19 outbreak.
- The business was forced to close because of government actions during the outbreak.
What is the Timeframe for Applying?
Although an extension was granted, the timeframe for PPP loans is rapidly closing, and it is only open until May 31, 2021. The program has another limit: it is on a first-come, first-served basis.
The timeframe for Employee Retention Credit is slightly different; it can be claimed on qualifying wages through December 31, 2021.
How Much Aid Can I Receive?
Payment Protection Program
Under the PPP, a business that is receiving its first round of loans can get upwards of $10 million. Those applying for a second loan can receive only $2 million. However, everything is contingent on the business’s payroll costs over the application period. The business can receive 25% on top of that amount, too.
Employee Retention Credit
The ERC is a tad more complicated. The employer can receive a tax credit of $7,000 per employee. That number comes from the calculation whereby each credit is worth 70% of qualifying wages and their health plans up to a maximum of $10,000 of the wages.
The major distinction for the ERC lies in the number of employees in a business. For a company with fewer than 500 full-time employees, the credit is calculated using the wages of all employees during the time in which the company suffered from COVID-related shortfalls.
When the company has more than 500 employees, the credit is calculated based on the wages who were not working during the decline in sales or during suspended operations.
The PPP and ERC can help businesses stay afloat during these tumultuous times. Applying for a loan or credit will require timeliness and some expertise. The sooner a business files the paperwork, the sooner it can receive the much-needed aid.
Contact us today to help you navigate through the selection and application process!
