The American Rescue Plan Act was signed into law March 11, 2021, and finally gives 501(c)7 Social Clubs the opportunity to apply for Payroll Protection Program (PPP) loans. It took a year of begging and pleading with Congress to open up the PPP loans to Social Clubs and it is finally here. But you better act fast because the funding for the second round of the PPP loans closes on March 31, 2021. There is not much time to qualify so you better decide quickly whether your Club would rather claim the enhanced Employee Retention Tax Credit (ERTC) in 2021 versus applying for the now available PPP loan funds.
The Act expands eligibility for the PPP by including all 501(c) organizations, including 501(c)7 Social Clubs that do not fall under Small Business Administration regulations barring the participation of private clubs that limit their membership for reasons other than capacity. Employers with less than 300 employees can apply for a second round of PPP loans. For 501(c)7 Social Clubs, this will be their first draw. Loans are based on 2.5 times the average monthly payroll from 2019 or 2020. You have 24 weeks to use the PPP loan funds on payroll, employee benefits, utilities, rent, and interest expense. After the 24-week period, Clubs can apply for loan forgiveness from the Small Business Administration. Loan amounts not used on qualified expenses are subject to 1% interest and will need to be repaid within 24 months.
The ERTC rules were enhanced for 2021. Small employers, defined as having less than 500 full-time employees, are eligible to claim a credit on 70% of the first $10,000 of wages paid to each employee per quarter. A full-time employee is defined as having worked on average more than 30 hours per week or 130 hours per month. Small employers can claim the ERTC if they experienced a 50% reduction in gross receipts for any quarter in 2020 as compared to 2019. Alternatively, small employers can qualify for the ERTC due to a full or partial government suspension. To qualify for a partial government suspension, the tax payer must demonstrate that there was a more than nominal financial impact caused by a government shut-down. Many clubs have been under governors’ orders to reduce their capacity of indoor dining facilities. For most clubs, this has resulted in a more than nominal financial impact and thus they should qualify to claim the ERTC so long as the Club continues to be under a government occupancy restriction. The American Rescue Plan Act extends the ERTC through the end of 2021.
Clubs can actually take advantage of both the PPP and the ERTC. You just can’t use the same wages to qualify for both. Any PPP covered payroll will not qualify for the ERTC. But if there are wages that are not covered by the PPP loan funds, then your Club could qualify for the ERTC if there was a more than nominal financial impact from a full or partial government shut-down.
Clubs need to quickly decide whether they want to pursue PPP loan funds before the funding runs out or the program ends March 31. Clubs that may not have been impacted by a government shut-down will definitely want to apply for a PPP loan. In general, the PPP loan will be more advantageous than the ERTC. The ERTC could be available for a longer period of time, depending upon how long state and local governments place restrictions on indoor dining occupancy.
If your Club is having difficulty navigating the complexities of the rules and regulations of either the Payroll Protection Program or the Employee Retention Tax Credit, reach out to a PBMares advisor today.