The headlines about the new CARES Act make it sound like Uncle Sam is driving his Brink’s truck down the road with the back doors open. Cash is raining from the sky, and American businesses just need to grab black garbage bags and stuff them as fast as they can.

Is that really true? Is there “free” money in this law?

Turns out there are three main programs for businesses that can help you during this trying time:

Program 1: Emergency Injury Disaster Loans (EIDLs).

Program 2: Paycheck Protection Program (PPP) Loans.

Program 3: Employee Retention Tax Credit.

Amazingly, each program potentially offers “free” money that does not need to be paid back.

The highly simplified chart below shows the most basic facts about each program. Please keep in mind, everything in this article is painfully over-simplified. I’m just writing to keep you informed at a very high level.

Program 1: Emergency Injury Disaster Loans (EIDLs)

If your business has been injured by the sudden downturn, the Emergency Injury Disaster Loans of $10,000 appear to be a no-brainer. All 50 states qualify as disaster zones. Apply on the SBA website and receive the $10,000 within 3 days. It seems very likely you will not need to pay the money back.

IMPORTANT CAVEAT: Before you apply for the $10,000, read about Program 2 (PPP loans) below. If you decide to go for a PPP loan, I would hold off on applying for this $10,000 until after your PPP loan is funded. This is particularly true if you might qualify for a large PPP loan. There doesn’t appear to be any conflict between Programs 1 and 2, but it isn’t worth jeopardizing Program 2 over $10,000.

Program 2: Paycheck Protection Program (PPP) Loans.

Under this program, you receive an SBA loan equal to 2.5 months of your 2019 average monthly payroll (including most common benefits).

There is potential for the loan to be forgiven, in the amount of up to 8 weeks’ worth of payroll/interest/utilities/rent. 75% of the forgiveness amount must be payroll. The 8-week forgiveness period starts ticking the day you get the loan, and cannot extend past June 30, 2020. That means you’ll need to have your PPP loan in place around April 30, 2020, to take full advantage of the 8 weeks.

The forgiveness aspect looks very attractive, especially for companies with high wage workers doing hundreds of thousands in monthly payroll. There is limited funding (if you call $349 billion limited!) and it will be dished out first-come-first-serve starting April 3, 2020. I suspect it will get messy at the banks.

Before rushing to sign up for a PPP loan, consider these caveats:

The law mandates final guidelines must be issued within 30 days. The guidelines are in flux and new information is emerging constantly. I wouldn’t bet the farm on having 8 weeks of payroll forgiven. Treat this as a loan application. Having said that, the one page summary on the US Treasury website makes it sound like forgiveness is pretty certain if you can certify uncertainty in your business due to coronavirus (and use the proceeds for their intended purpose).
You cannot tap into a PPP loan (Program 2) and claim the Employee Retention Tax credit (Program 3) discussed below. THIS IS AN IMPORTANT CONSIDERATION.
However, if you do not qualify for Program 3, and you legitimately need money, what is the downside of applying for a PPP loan? Worst case you get denied, middle case you get the loan and have to pay it back (eventually), and best case a good chunk of the loan is forgiven.
Don’t kid yourself, in the end, it will be an administrative hassle to qualify for loan forgiveness. However, with potentially six and seven figures of free money in the offing, I’m sure there are folks willing to go through some administrative hassle!

Program 3: Employee Retention Tax Credit.

This program is a tax credit, not a loan. To qualify, your <100 employee business needs to have been adversely impacted by local coronavirus mandates or restrictions. Alternatively, you must have experienced a 50% drop in quarterly sales compared to last year. The IRS just put out a highly informative guide on this credit.

If you meet either of those criteria, you are eligible for a 50% credit for wages paid to employees. The credit maxes out after $10,000 of wages per employee ($5,000 credit). For example, if you have 5 employees who each receive $10,000 ($50,000 total) in a calendar quarter that your business qualifies, you would get a payroll tax credit of $25,000. This credit is claimed on your quarterly payroll tax forms and any excess is refunded to you.

The credit applies to wages you pay employees through December 31, 2020. However, the program can end for you before that in the quarter the restrictions are lifted and/or your sales climb back to 80% of prior year quarterly sales. That probably isn’t a big consideration because most companies will earn their $5,000 max credit on each employee in one quarter anyway.

The Big Decision

Assuming your business qualifies for both, do you apply for a PPP loan and plan on 8 weeks’ worth of payroll forgiveness, or do you take the $5,000 credit per employee? You can do your own math.

To me it appears companies with full-time higher-paid employees might benefit most from a forgiven PPP loan, assuming they can get the loan in time for a full 8 weeks of forgiveness. Companies with a wide pool of lower-paid employees might ultimately benefit most from the $5,000 per employee tax credit.

Timing is another key consideration when choosing between a PPP loan and the tax credit. If your workforce is laid off right now and collecting healthy unemployment benefits, perhaps it makes sense to skip the PPP loan and hope the tax credit applies to your wages when you bring your employees back.

Last but not least, you do not need to pay income tax on the forgiven PPP loan, but early research indicates you likely will owe income tax on much of the tax credit. That fact makes the PPP loan even more attractive in certain situations.

In all this remember — this law is intended for companies that are suffering.

If your business is cruising along fine, don’t be greedy. Remember — pigs get fat, hogs get slaughtered!

Is there “free” money in this law? The short answer is “yes.” The federal government is clearly taking great effort to bail out troubled companies. The long answer is “like anything, don’t rush in blindly without understanding what is best for your situation.”