Good morning,
I hope you all had a happy Mother’s Day. Mine was filled with really good food cooked by my husband and really good hugs from my son. My son (who had a weekend job this winter, earning his own money for the first time) did alert me on Friday that he had “just ordered your Mother’s Day gift, but it won’t be here for a few weeks.” I think growing up in a world of two-day shipping has perhaps lulled his generation into complacency. Either way, it’s the thought that counts, right?
Today, I’m going to briefly review the announcements the Governor and Department of Economic and Community Development made on Friday afternoon about the “Rural Reopening Plan.” Then, I’m going to wade into a very complicated question: should shuttered hospitality and service businesses that received a loan through the Paycheck Protection Program (PPP) but still have a majority of their staff out on furlough consider returning their PPP before this Thursday’s deadline? If you’ve taken a PPP and are worried about whether you’ll qualify for much forgiveness, this question is worth at least pondering.
The information below is accurate to the best of my understanding as of 6:00 a.m. on Monday, May 11. Much of the guidance on the reopening plan and the federal relief programs have been released only very recently so there is definitely the possibility that I’ve missed something or that things will change as the situation continues to evolve – in helpful or unhelpful ways – after I send this newsletter out.
“Rural Reopening Plan” accelerates reopening of retail and restaurants in 12 of 16 counties
After announcing on Thursday a blockbuster deal with IDEXX to provide a steady supply of COVID-19 testing materials to the Maine CDC for the next several months, Governor Mills returned to the podium on Friday afternoon to announce some significant updates regarding the timing of lifting and rolling back some restrictions on certain businesses in 12 of Maine’s 16 counties. Cumberland, York, Androscoggin, and Penobscot counties, where community spread of COVID-19 has been detected by the Maine CDC, are excluded from the accelerated plan. In the remainder of the state, retailers are permitted to open today and restaurants will be permitted to open next Monday. However, businesses are still subject to strict health and safety guidelines outlined in the Maine CDC’s COVID-19 Prevention Checklists. Beginning today, gyms throughout the state are allowed to hold outdoor exercise classes with fewer than 10 people and to offer 1-on-1 training. Governor Mills and DECD Commissioner Heather Johnson both stressed that businesses are not required to reopen under this plan.
While the COVID-19 Prevention Checklists were designed to give business owners and managers the guidance they need to lawfully open, I recommend that every Mainer read through them. These checklists will provide everyone with a good understanding of the types of rules, restrictions and changes to business practices that they can expect to experience at both their workplaces and the local establishments they visit as things start to reopen. It’s important to make sure everyone is on the same page so once businesses reopen, they can stay open.
Should you return your PPP loan before the Thursday, May 14 deadline to do so?
A few weeks ago, when headlines began to expose the large publicly traded companies that had received PPP loans meant for small businesses, the U.S. Treasury issued guidance allowing a “safe harbor” return for those PPP funds if a company could not certify that it really needed the money (e.g. Shake Shack, Nathan’s Famous). The “safe harbor” option was intended for these large businesses that had ready access to capital elsewhere. However, over the past couple of weeks, more and more legitimate small businesses, the ones that truly need the federal relief that PPP was designed to provide, are considering returning their PPP funds before the May 14 “safe harbor” deadline. Here’s why: Taking a PPP loan will disqualify you from another federal relief program, the Employee Retention Tax Credit.
As I’ve previously detailed in these morning updates, the U.S. Treasury has issued more guidance over the last couple of months that has made it harder for shuttered small businesses, whose workers were furloughed well before the CARES ACT passed in Congress, to qualify for full forgiveness of their PPP loans. This added guidance includes:
· requiring that 75 percent of funds be spent on payroll costs;
· limiting the expenses that can be forgiven to those within the 8 weeks following disbursement of the loan;
· requiring loans to be disbursed within 10 days of approval.
Both the U.S. Treasury and Congress have also stuck with the June 30 deadline for small businesses to restore full headcount and full salaries for all employees in order to qualify for full forgiveness. This deadline stands even though many hospitality and service businesses both in Maine and across the country aren’t allowed to open their doors to customers until after June 30. The U.S. Treasury rules also mean that unforgiven PPP loans are required to be paid back in just 24 months (with payments amortized over only 18 months), which makes the consequences for failing to qualify for forgiveness potentially quite dire.
Congress could still act to make PPP forgiveness more accessible by changing one or all of these rules. However, it remains entirely uncertain whether there is the political will to do so or what the timing of any such change might be. It certainly seems unlikely that any changes will be made in the PPP program before Thursday’s deadline.
This leaves small businesses that are not currently on track to receive full forgiveness of their PPP loans under the current rules with a dilemma: 1) gamble that Congress changes the PPP program so that their loans are fully (or more fully) forgiven, or 2) give the money back by this Thursday in order to take advantage of the Employee Retention Tax Credit (ERTC) program instead.
[Note: If you’ve already started paying furloughed workers with PPP funds while they are not working, it may not make sense to give your PPP funds back (and indeed you may not have the option to do so because the money has already been spent and you don’t have it on hand to give back). Also, if your PPP is used primarily to cover self-employed wages, most of the considerations below do not apply because the ERTC cannot be applied to self-employed wages.]
If you do have the option to return your PPP funds (either because you haven’t spent them yet or because you have savings sufficient to cover what you have spent so far), resolving the dilemma requires a thorough understanding of 1) how much PPP forgiveness you may be eligible for under the current rules, and 2) how much federal relief you could potentially receive through the ERTC. You should get help with this calculation. Reach out to a trusted accountant or lawyer or business advisor for help with this. (I cannot offer my readers any specific advice on how much forgiveness or ERTC your particular business might be eligible for!)
What is the Employee Retention Tax Credit?
The ERTC has received a lot less media attention than the PPP likely because it has some important limitations that may make it a less attractive option than the PPP, assuming you are eligible for full forgiveness of a PPP loan. However, if a business is on track to receive less than 50 percent forgiveness on its PPP loan, the ERTC may be the more attractive option.
The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000 so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
Experience a significant decline in gross receipts during the calendar quarter.
The IRS’s general guidance on the program can be found here. The IRS has recently issued guidance on what “fully or partially suspend operations” means and what a “significant decline in gross receipts” means. It will be critical for each business to assess whether they expect to fit in either of these categories and for which weeks or quarters of the year they expect to fit the categories that make them eligible.
Some of the recent guidance on the ERTC makes it a more attractive option than it was before. In particular, late last week, the IRS agreed that for businesses with fewer than 100 employees, the ERTC may be taken to cover health insurance expenses that the employer is paying on behalf of furloughed workers, even those workers who are not currently receiving any wages.
While the ERTC does not give you an upfront pool of money to use for expenses in the same way that the PPP does, the IRS has provided some ways to accelerate access to the credit. Employers can apply for cash advances of the credit if they expect that the amount of ERTC they are eligible for will exceed their employment tax obligations at the end of the quarter. This process gets way down in the weeds, so I won’t try to explain it all, but it is an important part of the calculation as to whether the ERTC would make sense for your business.
Bottom line: This is a very tough call for business owners, but it is worth spending time to fully consider. If you’ve already received a PPP, the deadline for deciding whether to return the loan is Thursday, so you need to tackle this issue right away. I urge you to reach out to a trusted accountant, lawyer, or business advisor for help on this. While I can flag that it may be a question for your business, I cannot advise you on how to how to decide given your particular circumstances. I don’t know more about ERTC than what I have been able to read in the IRS FAQs that were issued just last week, and I don’t have a crystal ball to know whether Congress might make the PPP the more favorable option down the road. I really wish I did.
***
Over the weekend, there was a story on social media about customers getting angry about long lines at a business in a nearby state that had reopened with strict physical distancing rules in effect. Customers expressed their frustration by verbally berating the business’s young employees. I worry about that happening more frequently as we start to ease some of the restrictions and people start to emerge, tired and frustrated, from long weeks of social isolation. We’ve been holed up for so long that perhaps it is natural that our patience with each other may wear thin quickly if long lines persist into the reopening phase. Before March of this year, it was unheard of for Americans to stand in a queue outside of a grocery store or a local shop. But as I look toward the realities of what it will mean to reopen restaurants with physical separation between tables and reopen retail with limits on the number of people who can be in a small store at once, patience is going to be required. Honestly, I hope that I have to wait in long, physically distanced lines at the small businesses in my community this summer. That would be a signal that, despite the lack of tourists and all of the occupancy restrictions, there might just be enough revenue coming in for these local businesses to survive. I hope that you’ll adopt the same outlook on such long waits, and praise these businesses for managing things safely and cautiously as we all figure out what the next new reality is going to look like.
Be well and be patient with each other.
With love,
Heather
P.S. I can be reached at heather.sanborn@legislature.maine.gov. (Please don’t ask me to help you decide whether PPP or ERTC makes more sense for your particular business. I can’t answer that!)
P.P.S. You can subscribe to these updates at heathersanborn.substack.com.