Maximizing Both the Employee Retention Credit and PPP Loan Forgiveness
For 2020, eligible employers with a PPP loan can now claim the Employee Retention Credit (ERC), although the same wages cannot be counted for both. The IRS has made clarifications to the CARES Act changes passed late December that expanded eligibility for the ERC in 2020. It now may be easier for employers to both achieve PPP Loan forgiveness and get ERCs, but it is a balancing act!
With the first round of the PPP, forgiveness and the ERC were mutually exclusive, so you had to pick one or the other, but now business owners and employers have options. The key is finding a way to maximize the benefits of each one. There is a limitation on the dollars used for the PPP and the ERC, but if done right you can get full PPP Loan forgiveness and the full ERC amount available to you. We are here to help.
For 2020, the ERC can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, if they experienced a full or partial suspension of their operations, or a significant decline in gross receipts. The ERC is equal to 50% of qualified wages paid, including health plan expenses, for up to $10,000 per employee in 2020 for all calendar quarters. The maximum credit for qualified wages paid to any employee is $5,000. Eligible employers that received a PPP loan can now claim that ERC, BUT the same wages can not be counted both for seeking forgiveness of the PPP loan and for calculating the ERC!
Key Point: The filing of a PPP Loan forgiveness application should not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.
More ERC changes for 2021:
- The Employee Retention Credit has been extended through the first 2 quarters of 2021;
- Credit amount increases to 70% of qualified wages;
- Cap on qualified wages is increased from $10,000 total to $10,000 per quarter;
- Reduction in gross receipts to qualify if the business was not shut down by government order is now reduced to 20% year-over-year;
- Businesses with less than 500 employees can now take the credit for all employees; and
- Some non-profits now qualify as eligible employers.
Our tax professionals have been advising patience, amended returns, and quantitative analysis to guide clients through the complexities of claiming both the PPP forgiveness and the ERC. Businesses that got PPP loans last year can apply for a “second draw” if they still need resources, full story HERE: https://www.fuoco.cpa/drill-down-on-2nd-round-ppp-loans/. Many small businesses are going to qualify for it (and the ERC!) through a gross receipts analysis or a partial suspension of operations analysis. For some businesses owners the economic benefit and tax benefit of the PPP will far outweigh the ERC, but every business situation is different.
Eligibility for the PPP loan is priority #1, but analyzing payroll for the 1st Quarter of 2021 may provide some insight for the ERC. Look at the date of your loan and perhaps you will be able to take advantage of the ERC for a certain period of the year without affecting the PPP forgiveness. For the PPP, whenever your covered period runs out on this new loan, you’re going to apply for forgiveness. The 941 at the end of April of 2021 may be used to get the ERC credit, but you can get an ERC credit upfront via the 7200 form.
We also have clients taking a first round PPP loan that didn’t qualify or couldn’t obtain funds last year. For them it makes sense to analyze the payroll and non-payroll costs for the PPP. There may be an opportunity to use some PPP proceeds to potentially get forgiveness – then for the non-payroll costs, maximize those up to that 60/40 ratio. That may make you eligible to go after the ERC. Timing of the funds used for forgiveness will matter. If you’re outside the covered window, then what is spent on payroll should be applicable to the ERC. If an employee makes more than the $100,000 cap in the PPP, you might be able to take advantage of the ERC….we are waiting for further guidance for more complex scenarios.
Remember, Congress also affirmed deductibility of expenses paid by forgiven PPP loans within The Consolidated Appropriations Act, 2021. There were also tax extenders and enhanced tax credits included in the bill. A full list is HERE.
Reach Out To Us: Just when you thought things could not become more complex, new legislation arrives, and with it more questions. There are retroactive changes to the ERC that apply to 2020. Keep in mind that new legislation extended and modified the ERC for the first two calendar quarters in 2021, but the recent guidance only addresses the rules applicable to 2020. More guidance is on the way regarding the changes for 2021. Let our tax team and PPP Loan advisors help guide you and your business. After all, opportunities lost and mistakes made can cost you $$$. Contact us at CPA@Fuoco.com or call 855-542-7537 for assistance.