PPP Caveats – Was It Really Worth It?

  • If your net profit for 2019 was negative, meaning that you took a loss in your business last year, PPP will not be a great option for you. If your business took a loss prior to COVID-19, you will not have been considered to have a salary, and it will be more difficult for you to represent that COVID-19 has had a negative impact on your business.
  • The Economic Injury Disaster Loan (“EIDL”) was a viable alternative to the PPP. This was a grant available up to $10,000. COVID 19 EIDL advances were also available, as were many other commercial grant programs. In fact, the Finimpact Squad dedicated an entire article to the huge list of resources that were available during COVID and were surprised that so few business owners knew of their available options.
  • As an S-Corp, shareholder distributions do not count towards your salary. Your only way to remit payroll taxes is through payroll itself; you don’t pay any payroll taxes or self-employment taxes on your distributions.

Believe it or not, there are many reasons why you may not wish to take out a PPP loan (when it was available). First off (as mentioned above), is that most businesses will not actually qualify for forgiveness! This was something of a slight of hand perpetuated by the SBA. Still, a loan at 1% is extremely competitive, though not quite the free offering as was advertised.

The second consideration is that you are likely to lose many employees anyway, for a myriad of different reasons. The entire purpose of PPP is to pay employees so they can come back to work when the virus has ended. But many simply do not wish to go back to work, as they are afraid of catching the virus or because they can simply make more through Pandemic Unemployment Assistance, which is another method of relief.

Finally, there were many other options available to the small business owner when the PPP program was in operation. An update to the Act (“PPP Flexibility Act”) allowed the PPP and Employee Payroll Retention Tax credit to both be permissible simultaneously.

This allowed up to $5,000 per employee as a tax credit against Social Security wages

Other than this, you might not wish to take out the PPP loan if you are not confident that your business will survive or because you simply have no real need for the funds. Either way, the question is a little redundant right now, given that the PPP program is no longer in operation.

A payroll cost is essentially what a business owner pays to employees and associated benefits. The CARES Act was quite generous in its scope in terms of what could qualify for a payroll cost. It includes:

  1. Salaries, tips, and commissions.
  2. State and local employer payroll taxes.
  3. Health insurance premiums.
  4. Employee retirement plans.
  5. Net profit (for the self-employed only).

The CARES Act also created the Employee Payroll Retention Tax Credit

Again, the main qualification is that you really need the loan itself and are not just “playing the system”. You have to be able to justify the expense. According to Treasury.Gov:

“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith”