Some Dealers May Find Employee Retention Credits and Employee Payroll Tax Deferrals a Better Option Than Applying for a SBA PPP Loan
Paul R. Norman | 04.03.20
The CARES Act (sometimes referred to as Covid‑3), which was passed last week, creates alternative programs to help automobile dealers and other small businesses to cover or defer their payroll costs during the coronavirus crisis. These programs include:
- The SBA Payroll Protection Program provides forgivable loans in an amount equal to 2.5 times a dealer’s average monthly “payroll costs” (as defined in the Act) (not to exceed $10 million dollars).
- The Employee Retention Credit (“ERC”) provisions provide refundable tax credits (not to exceed $5,000 per employee) of 50% of qualifying wages paid from March 13, 2020 through December 31, 2020.
- The Employee Payroll Tax Deferral (“EPTD”) provisions allow employers to defer payment of the employer share of payroll taxes owed on wages for the period ending December 31, 2020
The catch is that employers who receive PPP loans are not eligible for the ERC and EPTD benefits of the Act. This means that, before accepting a PPP loan, dealers need to sit down with their accountants or other financial advisers and calculate whether the PPP or combination of the ERC/EPTD benefits will be most beneficial to them. To do this, dealers need to have a good understanding of the qualifications and terms of each program. Here is a very basic summary of those qualifications and terms. Dealers should consult with their financial and legal advisers for the full details of each program.
Payroll Protection Program Loans (“PPP”)
- In business on February 15, 2020
- Less than 500 employees (aggregation rules combining employees of dealerships under common ownership don’t apply if your manufacturer has been assigned a FIC code by the SBA)
- Borrow up to a maximum of $10,000,000 or 2.5 times average monthly payroll costs for the year prior to the loan being made
- Loan forgiveness of an amount equal to the following payments made by the dealer in the 8‑week period after loan origination: (a) payroll costs (excluding wages in excess of $100,000 on an annualized basis to an individual employee); (b) interest payments on mortgages, rent payments on leases and utility payments for services, if the contracts under which the payments are made were entered into before February 15, 2020. However, the amount of loan forgiveness will be reduced to the extent that you reduce your workforce or compensation for individuals earning less than $100,000 on annualized basis. Also, SBA regulations just issued provide that at least 75% of the forgiven amount must have been used for payroll costs.
Employee Retention Credits (“ECR”)
- No PPP loan
- Available to all employers regardless of size
- Employer’s business must be fully or partially suspended by government order due to COVID-19 (not the case for Wisconsin motor vehicle dealerships which are exempt from mandatory closure as “essential businesses”) or employer must have experienced more than a 50% decline in gross revenues in a calendar quarter compared to the same quarter in the prior year
- The employee retention credit is equal to 50% of wages paid to an employee after March 12, 2020 up to a total $10,000. The maximum credit per employee is $5,000.
- For an employer with 100 or fewer employees in 2019, the credit can be received on wages paid to all employees
- For an employer with more than 100 employees in 2019, the credit can be received only on wages paid to employees who are not working (Note: Dealerships with common ownership will have their employee counts combined in determining whether they had over 100 employees)
- Wages do not include emergency sick or family leave payments made under the Families First Coronavirus Response Act (Covid ‑2)
Employee Payroll Tax Deferral (“EPTD”)
- No PPP loan
- Otherwise, any employer
- Employer may defer payment of the employer portion of social security taxes from March 27, 2020 through December 31, 2020
- 50% of deferred payments will be due December 31, 2021
- The remaining 50% of deferred payments will be due December 31, 2022
PPP vs. ETC/EPTD
Assuming you are otherwise eligible for both PPP and ERC, the analysis of whether you are better off receiving a PPP loan or receiving the ERC and EPTD benefits instead, logically starts with determining:
- The maximum PPP loan you are eligible to receive less the likely amount of the loan that will not be forgiven because of employee or wage reductions or failure to meet the SBA imposed requirement that 75% of the loan proceeds be used to cover payroll costs; and
- The amount of ERC credits for which you are eligible. If you had 100 or fewer employees during 2019, this will likely be $5,000 per employee unless you have received emergency sick or family leave tax credits under COVID — 2
If the amount under B is greater than under A, you are probably better off not applying for a PPP loan and taking the ERC credits instead. Even if you cannot reduce your employment tax deposits to fully account for the credits that you expect to claim on your employment tax return for the applicable quarter, you can receive an advance payment of the credits by filing Form 7200 with the IRS. https://www.irs.gov/pub/irs-pdf/f7200.pdf. Plus by foregoing a PPP loan and applying for ERC credits instead, you will remain eligible for the cash flow benefits of being able to defer payment of the employer portion of social security taxes under the EPTD provisions of the Act.
The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.