Comply With Us

PPP or Retention Credit?

May 12, 2020

We’re back again friends to continue our COVID-19 conundrum series! As everyone knows by now, the Coronavirus Aid, Relief and Economic Security (CARES) Act created two economic relief programs for American businesses. The Paycheck Protection Program (PPP) is all over the news, but the more understated Retention Tax Credit is also an option. Now that both programs have been available for a few weeks, a few people have asked which we think is best. While we cannot provide anyone with specific tax and accounting advice, friendly or otherwise, there are some discussion-worthy nuances to each program.

Both programs can help pay employees and keep them on group health insurance plans. Before we dig into crucial distinctions between them, here are the basics of each:

Paycheck Protection Program (PPP)

The Paycheck Protection Program is a low-interest business loan program processed through private lenders and administered by the Small Business Administration (SBA). To be eligible, employers generally need to have 500 or fewer United States-based employees according to the SBA affiliation rules. Businesses also need to certify they are facing “economic uncertainty” due to COVID-19. PPP eligibility includes sole proprietors. Businesses with a NAICS code that starts with 72 (food service and accommodations sector) and religious institutions do not need to abide by those affiliation rules – they qualify on an entity basis.  Also, some businesses with a more significant number of employees can be eligible if the company meets the SBA employee-based size standards for the industry in which it operates. However, the SBA recently clarified that private equity firms and hedge funds need not apply.

PPP borrowers get a 1% interest, two-year loan equal to up to 250% of the employer’s qualified monthly payroll expenses. Qualified payroll costs include group health insurance expenses, among other things. If over the first 56 days following disbursement, the employer uses 75% of the funds for qualified payroll costs, that money, plus any of the balance spent on interest on mortgages, rent, or utilities are entirely forgivable. A company can use the money for alternative purposes or spend it over a more extended period. Doing so will just impact the amount of the loan that is forgivable.

The PPP loan application process began on April 3, 2020, and according to the CARES Act, employers have up to June 30, 2020, to participate. The PPP ran through its initial $350 billion funding allocation on April 16, 2020, temporarily halting the flow of applications. However, the Paycheck Protection Program and Health Care Enhancement Act signed into law on April 24, 2020, provides $321 billion in additional funding for the PPP. Application processing resumed on April 27, 2020. Some lending institutions are already out of their second round of funds, but others are still processing applications, as of this writing.

Retention Payroll Tax Credit

The CARES Act Retention Tax Credit is a separate program available to help almost all businesses, regardless of size, keep workers paid during the COVID-19 economic crisis. To qualify, an employer must fall into one of two categories:

  1. The business is wholly or partially suspended by government order due to COVID-19.
  2. The employer’s gross receipts were below 50% of the comparable quarter in 2019.

The only business entities ineligible for the retention credit are:

  1. State and local governments, including agencies or instrumentalities of those governments.
  2. Certain self-employed people (credit does not apply to self-employment income taxes).
  3. Personal households who employ people.
  4. Companies that take CARES Act SBA loans (including PPP loans). However, the IRS and SBA recently created an exception. If a company applied for and pays back/returns a PPP loan in full by May 14, 2020, then they can still claim the retention credit.

The maximum amount of the credit is 50% of qualifying wages paid up to $10,000. Wages can include salary and allocated health benefit costs. The credit applies to wages paid after March 12, 2020, and before January 1, 2021. Credit eligibility ends after a quarter when the employer’s gross receipts go above 80% of the revenue from a comparable quarter in 2019.

To access credit payments, employers reduce their required deposits of payroll taxes withheld from employees’ wages (including federal income tax from employees) by the amount of the credit. Then they document their eligibility and the money they kept on their quarterly tax filings via Form 941. If the tax money does not cover their credit costs, businesses can get the rest refunded by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Some Factors to Consider About Each Program

Size Limitations

Both the PPP and the retention credit require employee counting. Businesses with more than 500 employees generally do not qualify for the PPP loan program, but the retention credit is for businesses of all sizes (except ongoing PPP recipients and state/local governments).

While there are no limits on business size to access the retention credit, the way employers are allowed to claim qualified wage costs varies by the number of employees. For smaller companies with 100 or fewer full-time employees in 2019, the retention credit can be claimed for any employee’s wages and healthcare benefits during the COVID-19 hardship, including actively working people, those providing reduced services, and furloughed people.

Employers with an average of 100 or more full-time employees during 2019 can only use the retention tax credit money to pay wages and healthcare expenses for furloughed employees or those with reduced hours. These larger employers must use the credit to offset compensation and health benefits provided to people for the time they are not able to work due to COVID-19. Bigger entities can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship, too.

If you are wondering how to count to 100 full-time employees for retention credit purposes, whip out the skills you use to determine if a business is an applicable large employer under the Affordable Care Act. The IRC 4980H counting method and IRS controlled group rules apply to the retention credit as well!

Economic Harm

When Congress crafted the PPP COVID-19 economic injury standard, they intentionally made it very broad. The goal was to inject cash into the small and mid-sized businesses that fuel our economy. So, the PPP application just requires borrowers to certify in good faith that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” However, due to recent publicity about PPP high-profile borrowers seemingly with great liquidity, the SBA issued guidance stipulating when making this promise, borrowers need to assess current business activity and their ability to access other sources of capital without jeopardizing the entity long-term. The Trump Administration is planning to audit all loans of $2 million and above, and the SBA now notes all borrowers “should be prepared to demonstrate to the SBA, upon request, the basis for its certification.”

The retention credit has more specific eligibility standards. An employer must be fully or partially suspended by COVID-19 related government order, or be able to show gross receipts down by 50% or more from the same time last year. However, in the current economy, many businesses will meet one or both of these requirements. Large swaths of the country were, or continue to be under closure and stay-at-home orders. Even essential firms, or those who may be able to reopen in some form shortly, could still be eligible. For example, if a retail location is allowed to “open,” but only for curbside pickup and not physical shopping according to state or local order, it would qualify. A restaurant permitted to open for table service, but only at a reduced seating capacity, would also still be considered partially suspended.

Financial Value

On the face of it, the PPP may seem like a more generous option. It can provide participants with up to 250% of the business’s qualified monthly payroll expenses, which is a lot of cash. However, there are some critical limits to PPP funds too. The maximum amount an employer can obtain is $10 million. Right now, borrowers must spend any funds they hope to be forgiven within 56 days of disbursement, even if their business cannot operate at capacity due to government order or safety reasons. Seventy-five percent of the money must be spent on qualified payroll costs. The maximum annual salary level counted is $100,000 when seeking loan forgiveness. Reducing an employee’s salary by more than 25% if they made less than $100,000 a year to start also affects loan forgiveness. Amounts for which the employer receives a paid leave tax credit do not count either. Plus, it is a two-year loan program. Even though it is a loan with 1% interest and some generous forgiveness provisions, most borrowers are going to have to pay at least some of the money back.

Depending on the employer’s size and workforce status, the retention credit can provide a great deal of funding too. It is limited to a maximum of $5000 per employee (which may include both salary and allocated group health costs), but there is no total maximum per employer like there is with the PPP. Depending on the size of the company, it can either apply to all employees or just to furloughed workers and employees with reduced hours (if the employer is paying them for hours where they are unable to work for COVID-19 related events). Just like the PPP, companies cannot double-dip and get a retention tax credit for an employee’s wages and benefits if also claiming a paid leave tax credit for the same employee during the same period. However, depending on how long the business qualifies for the credit and how long an employee takes paid leave, it might be possible to claim both tax credits for the same person, just for different periods.


The PPP requires a business to apply through an SBA-approved lender before June 30, 2020, and funds are first-come-first-served. Available funds already dried-up once, and even with the new cash infusion, experts are predicting that the program will run out of money within a week or two.

The retention credit is essentially immediately available – no application required.  Since it’s a tax credit, the financing is different, and it cannot run short of funds. It also applies to any qualified wages paid during the eligible period of March 12, 2020, to January 1, 2021. So, say an eligible employer did not take a PPP loan, and their summer 2020 receipts were less than half of what they were last year the business could still access the Retention Credit.

Some Unknowns About Both

A friend and fellow compliance nerd’s wife described the current state of his job as flying a plane while simultaneously building the aircraft. While we feel like helping employers and health insurance professionals navigate the Coronacrisis is a little less dangerous than that, in many ways, it is an apt analogy. Even though business owners are accessing the PPP and the retention credit right now, critical details about how it will all work are still TBD.

With the PPP, every time we talk about it, we come up with a few more questions to ponder obsessively. For example, how will the loan forgiveness process work exactly? Another biggie we are unsure about is how to calculate every eligible cost. Many of the key terms when it comes to qualified payroll expenses have very broad definitions – will forthcoming rules and guidance add specificity? Interim rules are supposed to be coming about how to handle rehires and people that may refuse to come back to work for various reasons, and we are curious about parameters and about how to account for those people. How long exactly do employers have to rehire people or raise up salaries, if needed? Does everyone have until June 30th? What if their 8-week spending window runs out before then?

On the Retention Credit side of things, there are items to wonder about too. The IRS released Retention Credit FAQs on April 29, 2020. They’ve updated them a few times, including a major update on May 8, 2020, which reversed a previously-held position that businesses could not claim a retention credit for providing group health insurance coverage to furloughed employees if they do not pay these employees’ wages.  Now, according to the revised answers to questions 64 and 65, they can.

Due to the IRS’s propensity to move the goalposts mid-game by surreptitiously changing guidance content, we’ve been stalking the FAQ page quite a bit. While we think the person who formatted the page is a sadist (WHY can’t you scroll through the questions sequentially?) the answers are both comprehensive and very similar to the Paid Leave Tax Credit FAQs we discussed in this post. Just like with the Paid Leave Credit, we are not sure whether amounts elected by the employee to be paid on a pre-tax basis towards retirement plans and other qualified benefits (that are not group health plan benefits) are ultimately reimbursable to the employer. Both credits use IRC 3121(a) as the statutory definition of wages, which does not include those amounts. But if you can’t add these costs in, the credits become exponentially trickier for employers. We are hoping new instructions to Form 941 (the form employers will use to report on such matters), will clear things up. As soon as the IRS actually publishes them, we’ll be back to talk to you about it!