top of page

Government Loans, Made Simple

Updated: Jul 15, 2020

By Steven Davidson


Coronavirus has left us all living in a time where tough financial decisions must be made in order to stay afloat. Those who have small businesses have been faced with the need to make cuts and decisions to ensure they don’t go under before the pandemic is over, which has created uncertainty for those who work for them. Luckily, there are a few ways the government has made it easier to retain those workers through a few incentives to reward employee retention.


The CARES (Coronavirus Aid, Relief, and Economic Security) Act, which has over $2 trillion in relief funds, provides incentives for businesses to keep their workers rather than laying them off. It established two relief measures, the Paycheck Protection Program (PPP) loans and the Employee Retention Credit. Though both vary in a few ways, as I will discuss below, you can only pick one. Since there is no double dipping allowed, consider your eligibility for each and evaluate which would be more helpful.

Paycheck Protection Program

Overview: The paycheck protection program is a loan employers can apply for to cover payroll and qualifying business expenses. It provides businesses with eight weeks of financial aid based on their employment costs and incentives retention by promising forgiveness. The loan is for up to $10 million dollars and is calculated based on payroll expenses and salary calculations are capped at $100,000 per person. The loan has a maturity of two years and an interest rate of only 1%. 75% of the loan must be used for payroll and employee benefit costs, while the remaining 25% may be used for other business expenses in order to qualify for complete forgiveness.

Qualifications: In order to qualify for the loan, a business must have less than 500 employees and show that it has been negatively affected by Coronavirus. This includes self-employed individuals (independent contractors and sole proprietors), LLC’s, S corporations, C corporations, private nonprofits, tribal groups, and veteran groups.

For startups, the qualifications are a bit different. According to Smart Assist, if you are a startup backed by a venture capital firm, you may be required to include both your own employees and those of the venture capital firm. This only applies if the firm owns more than 50% of the startup or is in direct control over its operations.

Incentives: Here are some of the main attributes for the loan

● Has the possibility for full forgiveness

● Can apply for 2.5 times employment costs for the two months

● Low interest rate (1%), 2 year repayment plan, deferment for six months

● Quick money

● 25% can be used on other business expenses (as explained below)

Forgiveness: The PPP loan has the possibility for complete forgiveness if certain guidelines are followed. Complete forgiveness requires that 75% of the loan must be used for payroll and employee benefit costs, while the remaining 25% may be used for other business expenses. It also is dependent on how many employees are retained or quickly hired back once the loan has been administered. Forgiveness will be decreased for any full-time employee or wage declines.

What Expenses Qualify for the 75% Requirement?

The following are all considered covered costs

● Salary, wages, commissions, or any similar compensation ($100,000 max per employee)

● Employee Benefits such as medical insurance, vacation pay, and retirement funds

● Payment of State and Local taxes for employee compensation

Sole Proprietors/Independent Contractors: wages, income, net earnings, similar compensation from self-employment

The following are expressly excluded

● Compensation of non-US residents

● Any compensation of an employee in excess of $100,000

● Independent contractors

● Federal employment taxes

● Qualified sick and family wages

What Can the Other 25% be Used For?

Here are costs that qualify for the 25%

● Rent Payments

● Utility Payments

● Interest payments on debt obligations incurred before February 15, 2020

● Refinancing an EIDL loan from the SBA made between January 30, 2020 and April 3, 2020

For the Federal Register Rules and Regulations Official guide, click here.

One question creates some uncertainty. What happens if an employer attempts to rehire an employee but they refuse the offer? According to the US Treasury, an employee’s refusal will not negatively affect the business’ loan forgiveness. If the employer can show it made a good- faith attempt to rehire the employee for the same wages and hours and can prove that the offer was declined, then it can simply leave that worker off for the purposes of calculating the loan forgiveness reduction.

Cons: Though the PPP loan has a few upsides, here are some things to consider before applying

● If you have more than 500 employees, you are not eligible for the loan unless the SBA considers your business “small”

● There is a $10 million cap

● If the forgiveness guidelines are not met, the loan must be paid back

● If the remaining any 25% is not used for approved purposes, that amount must be paid back

● Does not cover payments to independent contractors

● Forgiveness reduced in certain situations (reduced headcount or wages)

● Nonpayroll costs must be paid or incurred during the loan period.

● Must apply before June 30, 2020

Link to Application: The SBA has warned against using an unapproved lender for the PPP. Click here for a list of SBA approved lenders. For a look at the application itself, click here.

For Help Calculating Your Maximum Loan Amount, check out Small Business Association’s Loan Calculator.

Employee Retention Credit

Overview: The Employee Retention Credit is a tax credit for employers which is equal to 50% of “qualified wages” paid to employees between March 21, 2020 and January 1, 2021. It is completely refundable and given to businesses and nonprofits who retain their workers through the Coronavirus pandemic. It is available through 2020 and a business can apply for the Employee Retention Credit alone or the PPP, but not both.

The amount for the loan is calculated by taking an employee’s wages for a quarter and cutting it in half. The maximum amount for wages to be accounted for is $10,000, meaning the maximum credit available is $5,000 for each employee who qualifies.

Qualifications: To qualify for the Employee Retention Credit, IRS says employers must be carrying on a business during 2020 and have either (1) “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 (2) Experience a significant decline in gross receipts during the calendar quarter.” To better understand the meanings of the requirements, here is a breakdown of the terms.

Partially Suspended Operations: When the government restricts employer’s operations so they can continue some, but not all of its operations. Businesses that are fully closed do not qualify.

Significant Decline in Gross Receipts: Determined by the first calendar quarter in which an employer's gross receipts, or profits, for the quarter are 50% less than the same quarter in 2019. They are considered out of the bubble when they have a quarter in which gross receipts are greater than 80% of the same quarter from 2019. This will take effect the following quarter.

Qualified Wages: Wages that have been paid between March 12, 2020 and January 1st, 2021 by an Eligible Employer to some or all employees. They are different based on company size. If there are more than 100 employees, qualified wages only count for those employees who are not providing any services because of either (1) or (2) of the IRS qualifications. If there are 100 or fewer employees, qualified wages are those paid to any employee during the period of hardship from (1) or (2).

Qualified Health Plan Expenses: Costs incurred by the Eligible Employer to provide a group health plan, so long as they are excluded from the employee’s gross income

Refunding: If the credit exceeds the amount the Eligible Employer would need to pay in certain federal employment taxes for the quarter, the excess is refunded to them. This is still subject to being used to offset other tax obligations owed and being counted as an overpayment. The overpayments will be subject to offset before being refunded.

Incentives: Here are the main benefits of the Employee Retention Credit

● Employer not required to pay employees the qualified wages

● Refundable

● Any size business can apply

● Extends through 2020

● Based on financial quarters

● May receive both this credit and tax credit under the FFCRA

Cons: Here are some things to consider before applying for this loan

● There are typically larger up-front sums granted for PPP’s

● Large businesses can only get credit for employees not working

● Only covers 50% of wages

● Requires a partial business closure

Link to Application: To get access to the credit. Eligible employers can reduce employment tax deposits they are required to make or request an advance payment with Form 7200 here.

To claim the Employee Retention Tax Credit, employers must report their total qualified wages and other related credits on their quarterly tax return, located here.

Other Options to Consider

The CARES act provides employers with 2 main ways of reducing the stress caused by employee job retention, but what if neither the PPP nor Employee Retention Credit are enough? There are a few other options provided by the CARES act to consider.

Tax Deferral

The CARES act allows for employers to defer some of their payroll taxes this year. Though it will not necessarily save any money since it must be paid back later, it allows for the money to be used for other purposes instead. CNBC reports that the bill allows for businesses to hold off on paying their Social Security and Medicare taxes (6.2% and 1.45% respectively). This applies to sole proprietorships as well. The first half of the deferment will be due at the end of 2021 and the rest will be due by the end of 2022.

Short-Time Compensation Programs

Though not the best solution in terms of job security, many states have begun what are called “short-time compensation programs” which benefit those workers whose hours were reduced. The hours required to qualify vary by state and they are currently available in about half of them. For a full list of states with programs, click here. The purpose of these programs is that the employer can reduce work hours and use state Social Security funds to supplement its lost hours. States with these programs will have funds transferred into their unemployment funds and be provided with several government incentives. This option does not directly benefit the small business owners because the funds are used to directly pay workers their lost pay, but business owners can take advantage of these programs to keep the goodwill of employees whose hours they are forced to reduce.


Are you interested in launching or sustaining a pandemic proof small business? Spot issues, take action, stay safe, and thrive in a post Covid-19 world with Legalucy. Learn more at

Your interaction with Legalucy and does not create an attorney client relationship. We provide information for your reference only. Such information should not and cannot be construed as legal advice. For more information, please contact


bottom of page