How Your Small Business Can Use ERTC Loans
In this article:
What is an ERTC loan?
Employee retention tax credit (ERTC) loans provide funding options to small businesses based on the employee retention credit (ERC) that was created to aid businesses during the pandemic. On March 27, 2020, during the peak of the COVID-19 crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act was initiated to help employers keep their employees and continue to pay salaries during the pandemic, addressing ERTC as part of the bill.
Since the CARES Act originated in 2020, many entrepreneurs are wondering if they are still eligible to receive benefits. Fortunately, the American Rescue Plan (ARP) extended the ERTC benefits multiple times, with the last change to qualifying dates extending the benefit stemming from the Infrastructure Investment and Jobs Act. Currently, employers are still eligible for a tax credit, and therefore a small business loan based on the ERTC, for wages and salaries paid through September of 2021. Small business owners that retained employees throughout 2021 and 2020 are eligible for a credit of 70% of qualifying wages per quarter, with a maximum credit per employee, per quarter being $7,000.
For employers that have already taken out a loan based on ERC for the fourth quarter of 2021 or that have filed Form 7200 requesting an advance payment, there are options. Advances received for employee wages paid in October, November, or December of 2021 must be repaid according to the due date on the Employer’s Quarterly Federal Tax Return, or Form 941, for that time period. Small business owners that owe a repayment of the fourth quarter advance can repay these funds with installments or by securing business financing.
What businesses qualify for an ERTC loan?
In 2022, employers can still qualify for an ERTC loan program through Biz2Credit based on the original eligibility requirements for the ERC relief credits. So which employers are eligible for ERTC loans? Eligible entities are for-profit businesses and nonprofits that operated during 2020 or 2021 and meet either of the following requirements:
Government Order Test
The government order test measures whether eligible employers had a calendar quarter where business operations were partially suspended or completely stopped because of a federal government mandate. This test primarily applies to small business owners that experienced a decrease or halt in business due to limited commerce and travel due to partial suspension. Employers that were forced to stop or postpone group meetings for commercial, social, or religious reasons during the pandemic also meet this eligibility requirement.
Reduced Gross Receipts Test
Gross receipts for a business include all collected revenues whether the receipts are considered ordinary gross sales income for that trade or business or are miscellaneous receipts. To be eligible for the ERTC, small business owners are considered an eligible employer if they have experienced a significant decline in gross receipts, which is defined as:
- 2020 income tax returns – Gross receipts that are reduced by at least fifty percent compared to the same quarter in 2019 are considered significantly declined.
- 2021 income tax returns – Gross receipts that are reduced by at least twenty percent compared to the same quarter in 2019 are considered significantly declined.
- 2021 alternative calculation – If the 20% requirement is not met, an alternative calculation for significantly declined receipts in 2021 allows business owners to use the receipts in the previous quarter compared to that same period in 2019.
Small business or large business
The size of your business is relevant when determining ERTC eligibility because the qualified wages that are available for the credit are measured by the size of the business. To classify the employer as small or large, the average number of full-time staff members in 2019 is counted. Using 2019 as the base calendar year for the size calculation applies to the 2020 and the 2021 ERTC eligibility period.
- 2020 income tax return – A business is considered small if they have 100 or fewer full-time employees.
- 2021 income tax return – A business is considered small if they have 500 or fewer employees.
The ERTC and loans that are granted based on ERTC eligibility offer credit to employers based on eligible wages, but you may be wondering which payroll costs are considered eligible for the ERC. For small businesses, eligible wages include all wages, salaries, employment tax, and health insurance benefits paid to the employee. For large businesses, eligible wages and health insurance benefits only apply if they are being paid to an employee that is not providing their regular scope of services.
- 2020 income tax return – Wages paid from an employer that met qualification requirements between March 13, 2020, and December 31, 2020.
- 2021 income tax return – Wages paid from an employer that met qualification requirements between January 1, 2021, and September 30, 2021.
ERTC loans for businesses that have a PPP loan
The Paycheck Protection Program (PPP) is another cornerstone program that came from the CARES Act. The PPP, backed by the U.S Small Business Administration (SBA) and U.S. Treasury, was intended to provide relief to employers during the pandemic. PPP loans are the forgivable loans provided by some banks and other SBA-approved lenders to give immediate relief to many small business owners.
The PPP was later updated by the release of the Consolidated Appropriations Act (CAA) of 2021, which expanded the list of expenses business owners could use PPP funds and other economic impact payments (EIPs) to cover and clarified eligibility requirements for taxpayers that did not have a social security number. The CAA also allowed taxpayers that received PPP loan forgiveness to additionally claim a tax deduction for those eligible expenses and stated that a taxpayer’s assets could not be reduced because of PPP forgiveness.
Initially, per the CARES Act, employers were forced to choose to participate in the PPP or the ERTC. Many small business owners elected to get assistance through PPP loans because it provided more benefits, but on March 11, 2021, the American Rescue Plan Act of 2021 became law and modified previous COVID-19 relief programs, like the PPP and ERTC. According to the new law, employers with PPP loans could now have access to ERTC. The American Rescue Plan Act also stated that ERTC credits would be able to be claimed retroactively for 2020 and extended benefits through the end of the third quarter in 2021.
How your small business can find ERTC loans
Small business owners that are eligible for ERTC credits may also be eligible for ERTC loans. In this section, we break the process down into two separate actions: claiming ERTC credits and applying for an ERTC loan.
Claim ERTC credits
Since the ERTC is a payroll tax credit it cannot be claimed on a federal income tax return as a deduction to taxable income. ERTC credits for eligible employers are claimed on Form 941-X by calculating the ERTC for each pay period and subtracting the required payroll deposit by that amount. Form 7200 is used to request advanced payments for small business owners but can’t be more than 70% of average quarterly wages reported in 2019. Any credits received in advance are also required to be reconciled against the calculated ERTC, once actual payroll figures are available. Both forms are available on the IRS website.
Apply for an ERTC loan
Although PPP loans are no longer available, eligible business owners that were impacted by COVID-19 can still access ERTC loans. An ERTC loan is a financing option where the funds are issued by a bank or online lender, like Biz2Credit, and repayment schedules are arranged directly with the lender. If you are a small business owner that is eligible to receive ERTC, reach out to a lender today to discuss your loan options.
Additional government lending programs
In this article, we’ve talked about PPP loans and ERTC loans, but they are not the only relief programs available to small business owners and startup entrepreneurs that were forced to shut down or collected reduced revenues because of the pandemic. There are several other special government lending programs related to the impact of Coronavirus.
SBA Economic Injury Disaster Loans (EIDL)
Disaster assistance loans are available through the U.S Small Business Administration (SBA) for small businesses that were economically impacted by COVID-19. The disaster loans offer up to $2 million in assistance for qualified businesses. The SBA EIDL program can only be accessed in states where the governor has requested for the SBA to issue an EIDL declaration but can be used for any purpose including paying down other debts, payroll, and operating expenses.
Restaurant Revitalization Fund (RRF)
The Restaurant Revitalization Fund (RRF) is also offered through the SBA to give emergency aid to eligible business owners of restaurants, bars, food trucks, cafes, and other food and drink establishments. Any assistance provided through this program does not need to be repaid if the funds are used for eligible expenses by March 11, 2023.
Shuttered Venue Operators grant (SVOG)
The SVOG program came from the Economic Aid Act (EAA) and was created to help small business owners of entertainment venues access financial relief from the impacts of Coronavirus. The program set up more than $16 billion in grants to be administered by the SBA to shuttered venues. Applicants to the SVOG program are able to qualify for up to 45% of their gross receipts with a maximum disbursement amount of $10 million.
Alternative financing options for your small business
If you are a small business owner or startup entrepreneur looking for financing options for your business, but you do not qualify for a PPP or ERTC loan, there are several other funding options available at Biz2Credit including:
- Business line of credit – A business line of credit is a type of revolving credit where the borrower is approved for a maximum credit line. The business owner can then access fast funding anytime capital is needed. The payments made on a line of credit are computed only on the amount of funds withdrawn.
- Term loan – A term loan is a traditional type of small business financing where the borrower receives an approved amount of money upfront and repays the loan with monthly payments of principal and interest.
- Merchant cash advance (MCA) – A MCA provides a cash advance to small businesses and collects payments from future credit card or debit card sales. Payments on merchant cash advances are typically set up to be a percentage of sales, so this type of financing is a good option for entrepreneurs that expect an increase in revenues in the near future.
Employee retention tax credit loans may be a great option for small businesses that were impacted by the pandemic during 2020 and 2021. The proceeds from these loans are intended to help business owners continue to pay their employees, despite a significant decline in income. Whether or not you are eligible for an ERTC loan, consider contacting Biz2Credit to explore financing options. If you’re not sure what small business funding can do for you, check out Steven Pawlyk’s story about how he turned to Biz2Credit when his PPP funding fell short.