We’ve touched on it previously, but with so much confusion around eligibility for the Employee Retention Credit (ERC) for businesses that have received Paycheck Protection Program (PPP) funds, we thought the topic deserved its own article.
While the Consolidated Appropriation Act (CAA) has provided much-needed relief, it has also created a more complex situation for small business owners who received PPP loans. As we’ve covered, you may be eligible for ERC tax benefits, even if you received PPP funds. However, we highly recommend getting expert tax advice so your business can be fully forgiven for the PPP loan and receive the maximum tax credits through ERC. Let’s explore how PPP funding affects the ERC.
And if you’ve been following our ERC blog series, you know by now it’s complicated.
While small business owners may qualify for the ERC even if you received a PPP loan, you can’t claim the ERC on PPP employee wages that were used to seek PPP loan forgiveness. The IRS considers this double dipping, and you don’t want to get caught with your hand in that cookie jar.
When your small business is looking to maximize both ERC and PPP benefits, you need to tread carefully. First, you must complete a PPP loan forgiveness application. You may either use the 8- or the 24- week period that is covered to analyze it for the most PPP forgiveness as well as the ERC tax credits, without using the same wages for both.
When you report wages that are necessary on your PPP loan forgiveness application, it’s different than deciding to not use ERC wages. Small businesses may list wages on the application that are more than the minimum needed to receive loan forgiveness. The IRS is aware of this, so it enables small businesses to limit the amount of wages for the ERC opt-out option to equal the minimum amount necessary to receive PPP loan forgiveness based on expenses listed in the application. You still with us?
Let’s keep going. Now, the minimum amount of payroll costs that is necessary must be 60% of the entire loan amount combined with all other qualified expenses. That number is documented on the PPP loan forgiveness application. The minimum amount of payroll expenses is equal to the entire amount of the PPP loan. Therefore, it is critically important to ensure all eligible non-payroll costs are included with your PPP forgiveness application.
Additional Considerations When Maximizing Both ERC and PPP Funding
For small businesses that qualify for ERC in at least two consecutive quarters of a PPP-covered period, we recommend looking at the 24-week coverage period. If you do choose to move forward with this, we highly advise you take advantage of all non-payroll costs available. These include rent, utilities, mortgage interest and more. You do this in order to increase the amount of payroll costs that are on the PPP loan forgiveness application so you can use them for ERC during both quarters.
This means that wages that are PPP-limited for those employees who make more than $100,000 are eligible for calculation into ERC. For example, employers who provided health insurance are eligible for both ERC and PPP funds.
In addition, small business owners should review qualified wages that are not paid via a PPP-covered period to determine if they may qualify for ERC. Recently, the IRS issued additional guidance that states that PPP loan forgiveness did not need to be included in the gross receipts evaluation in order to see if the business met the required 50% or 20% reduction in 2020 or 2021, respectively, to qualify.
It is also worthwhile to note the Infrastructure Bill passed by the Senate in August 2021 includes a provision that ended ERC eligibility for many employers effective Sept. 30, 2021. This may impact the evaluation of which period you select as your PPP-covered period, as PPP wages that were paid after Sept. 30, 2021, may still qualify.
Remember, you don’t need to navigate these troubled waters alone. And you don’t have to figure all of this out yourself. When you qualify through ERC Specialists and provide us with your information, our team of experts will analyze both your PPP information and your payroll information to ensure you get the maximum ERC credits. Contact us
today to get the expert payroll tax advice you need to stay protected and receive the most funding from these important federal programs.