By Tyler Kem
Strike Tax Advisory
The U.S. government has poured nearly $6 trillion into the American economy since the beginning of the COVID-19 pandemic. Starting with the CARES Act in March 2020, COVID relief funds have attempted to reduce the pandemic's financial impact on businesses, local governments, and communities across the country.
Small business owners have had the unenviable position of navigating lockdowns while also dealing with labor shortages and supply chain disruptions. Two of the most popular COVID relief packages programs, the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC), are tools small business owners can use to recover in this economy. For maximum benefit, small business owners are able to stack the ERTC on top of their PPP loan, but only if they understand how the two programs can work together.
The Small Business Administration noted that 76 percent of small businesses took out PPP loans in 2020 and 2021, for a total of $790 billion. The PPP's forgivable loans provided up to $10 million for companies that continued to keep their employees on the payroll. According to the Federal Reserve Bank of Cleveland, "more money was devoted to this program than any other in the fiscal response to the pandemic."
The PPP loan was intended to primarily shoulder the highest business operating costs—payroll. However, only 60 percent of the loan was required to be spent on payroll for a loan to be forgiven. The rest could be spent on utilities, rent/mortgage, PPE for employees, or sick leave. Businesses were allowed to spend up to $46,000 per employee.
Millions of small businesses rushed to apply for PPP funds, requiring a second round of funding. By the time the program was over, the SBA reported the average business borrowed $101,000 in 2020 and $42,000 in 2021 to stay afloat. Businesses in the construction industry received the largest percentage of loans, followed by professional services, manufacturing and healthcare providers. Across industries, small business owners were able to borrow PPP funds to pay their employees.
A distinct advantage of PPP funding was that small business owners could use PPP loans to pay their own salaries. The Federal Reserve Bank of Cleveland credits the program with reducing the tsunami of bankruptcies expected by shuttering small businesses due to public health orders. Instead, the small business sector has been able to bounce back much faster than the large business sector.
Even though the PPP and the ERTC were designed to provide COVID relief to struggling businesses, as a tax credit, the ERTC is not limited by a funding problem. Eligibility is different as well. Business owners and related individuals (either by blood or marriage) cannot have their wages included as an ERTC eligible wage expense in the credit.
The tax credit is also only available to businesses that have W-2 employees on the payroll and that satisfy the IRS's either/or rule. Either the business had operations that were partially or fully suspended due to government orders related to COVID-19, or the business had a significant decline in gross receipts compared to 2019.
Affected small businesses could claim up to $5,000 per employee in 2020, and $21,000 per employee in 2021. Companies that qualify for both years of the ERTC could receive up to $26,000 per employee. The credit is limited to businesses that have less than 500 full-time employees, and the funds can be applied against quarterly payroll tax liability. For small businesses that have already paid their taxes, the ERTC will be received as a refund of the employer's portion of the FICA tax.
Prior to passage of the Relief Act in late December 2020, a business that obtained a PPP loan could not claim the ERTC. The Relief Act changed this rule retroactively. Now businesses that received a PPP loan have the opportunity to claim the ERTC for qualified wages.
To claim the credit, taxpayers will need to file Form 941X to amend their quarterly payroll tax filings so that they can receive their refund. Companies cannot count the wages they used the PPP loan on in their calculations for the ERTC.
As of the signing of the Infrastructure Bill in 2021, the ERTC will be available for affected businesses for up to five years after they filed their quarterly payroll taxes for 2020 or 2021. Any small business that was seriously affected by the last two years of pandemic uncertainty still has time to apply for the ERTC.
The Federal Reserve Bank of Cleveland reported in PPP Loans & State-level Employment Growth that PPP loans lessened employment loss, especially when companies were able to take out loans earlier in the pandemic. As the economy continues to recover, small businesses that took out PPP loans can still maximize their COVID relief funds by applying for the ERTC. This valuable credit will help them bridge the gap between pre-pandemic and post-pandemic life.
Tyler Kem is co-founder and president of Strike Tax Advisory, which helps businesses discover and claim government-provided tax credits and incentives available to them. Strike Tax helps SMBs compete more efficiently while keeping jobs in the United States. For more information, visit www.striketax.com.
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