On-Demand | The Intersection of ERC & PPP
Our panelists discussed the latest IRS guidance, as well as the interaction between the Payroll Protection Program and the Employee Retention Credit.
Carey Gertler: Thank you very much and welcome everybody. I'd like to briefly just introduce today's speakers. Alan Wink is a managing director in a capital markets group and has over 20 years of experience. He's a member of the firm's PPP committee. I would also like to introduce Oren Glass, he's a director in our private business service practice with over 10 years of experience, and he is a member of the firm's Employee Retention Credit committee. And myself, Carey Gertler, I'm a partner within the PBS Private Business Service Group with over 20 years of experience and a member of the employee retention committee group.
Today's outline, we're going to discuss some recent developments, give a brief, brief background on the Payroll Protection Program, talk briefly about the Employee Retention Credit and some interplay strategies between these two programs. Today's webinar is intended to give a brief overview of the Payroll Protection Program and the Employee Retention Credit, and how the interplay between these two programs can maximize your benefit. This course is not intended to provide a detailed analysis of either the PPP or the Employee Retention Credit as each of these can easily be hours of time.
So if you have any questions on some of the more detailed items on the payroll protection plan or the Employee Retention Credit, please reach out to an EisnerAmper committee member. I can't stress this enough. This is a win-win once in a lifetime opportunity. Typically, we're talking with our clients about tax liabilities, saving taxes, financial reporting, gap. This is a chance to talk about something different, to be a trusted advisor and help people navigate these difficult times. We're talking today because the information is extremely time sensitive.
As 2020 comes to a close in the complete tax returns, there could be potential opportunities to claim the Employee Retention Credit for 2020. In addition, as the first quarter of 2021 has just recently closed, it's important to evaluate eligibility for the 2021 Employee Retention Credit. We're talking about real dollars in real time and want to make sure you receive the maximum benefit. As always, things are changing and today's information is the most recent we have. It's important to be aware there could be potential changes down the road that could be impactful. I will now turn over the presentation to Alan Wink.
Alan Wink:Good day everyone, I hope everyone is well. The Consolidated Appropriations Act signed in late December of 2020 made available another almost $285 billion for second draw PPP loans. This act also made available another $35 billion for eligible borrowers that did not get a first draw PPP loan. The second draw loans were definitely targeted by the SBA to smaller and harder-hit businesses. The loan size was reduced from a maximum of $10 million to a maximum of $2 million and it was changed from 20 million to 4 million for a single corporate group.
The definition of small business changed from a company with 500 employees to a company with no more than 300 employees. Probably the biggest change for the second draw loans was that borrowers now needed to show and to certify to at least a 25% decline in grocery seats for at least one quarter in 2020 as compared to the same quarter in 2019. In order to qualify for the second draw loan, you only had to show one quarter that had a 25% or more decline in grocery seats.
Some additional developments regarding PPP, the president finally signed I believe on Tuesday approved extending the deadline for applying for first and second draw loans until May 31st. Prior, the program is going to end on March 31st, but now it's been extended another 60 days. Many of our clients are presently in the process of applying for loan forgiveness on their first draw loan. Technically, forgiveness applications do not have to be filed until the maturity date of the loan which is usually five years. There's certainly motivation for borrowers to file for forgiveness within 10 months of the end of the covered period since payments of principal and interest on the loan are deferred for 10 months after the end of the covered period.
The forgiveness forms have gone through several modifications over the last six months. The most recent modifications and the most current forms were modified the end of January of 2021. So there are three forms in existence now that borrowers can use when applying for loan forgiveness. 3508S form is used by all borrowers of $150,000 or less. The 3508EZ form is used by borrowers of more than $150,000, but these borrowers had no reduction in full-time equivalents and no individual or salary or wage reductions of more than 25%.
And then the last form used by everyone else is the 3508 form which is certainly the form that is most time-consuming to fill out and also requires the greatest amount of information. And this form is for all borrowers of more than $150,000 who were subject to full-time equivalent reductions or salary or wage reductions for an employee greater than 25%. What are the expenses that are eligible for loan forgiveness fall into two general categories. There are payroll costs and non-payroll costs. Payroll costs include salary and wages which are capped at an annual rate of $100,000 per employee, vacation, parental family and medical leave pay and employer paid insurance, health and retirement benefits. And once again, it's only the employer portion of that, not the employee portion.
Non-payroll expenses include mortgage interest, rent, utilities, and for additional categories of eligible expenses for loan forgiveness had been added. Covered operations expenditures which are business, software, or cloud computing services that are critical to a business operation, covered property damage which is physical property damage due to public disturbances occurring in 2020 which have not been covered by insurance. Covered supplier costs are expenditures to a supplier of goods that are essential to business operations. And the last category is worker protection expenditures, PPE expenditures to comply with government requirements or regulations.
Remember, in order to qualify for full forgiveness, at least 60% of your forgivable expenses must be for payroll costs. Assessing the length of the covered period. Now this topic will be increasingly important as we go through our presentation today since the length of your covered period can impact the amount of your Employee Retention Credits. The cover period starts the date of loan origination or when funds are transferred to your account by the lender. The borrower can select any covered period between eight and 24 weeks. So it's not eight or 24, it's any period of time between eight and 24 weeks.
Only funds that are paid or incurred during the covered period are eligible for forgiveness. There are certainly advantages to both a longer and shorter covered period. A shorter covered period allows for faster loan forgiveness, and also requires maintaining staffing levels for a shorter period of time. Longer covered period allows greater flexibility and planning for full forgiveness. It also increases the number of weeks to incur eligible expenses and increases your chances of getting full forgiveness. Longer period also allows more time to restore furloughed and terminated employees which can reduce forgiveness amounts.
Alan Wink:Okay, as we can see, 65% of the people got this question right. As you know, to get second draw loans, it's maximum 300 employees and you need to show a 25% decline in revenues for any quarter of 2020 compared to the same quarter of 2019.
Oren Glass:Hi everyone, this is Oren Glass. Thank you Alan for discussing the PPP second and also first draw loans. I'm going to now cover the Employee Retention Credit or the ERC. So the original CARES Act in 2020 created a refundable payroll tax credit as an incentive for employers to retain their employees in an environment where a lot of company's sales were impacted negatively. However, at that time in March of 2020, this credit got very little attention and the primary reason was that under the CARES act, employers that received PPP loans were not eligible for the Employee Retention Credit and I cannot stress this enough.
This is the number one misconception I'm seeing is that a lot of business owners are not aware that that rule changed as we will discuss shortly. For 2020, the credit was equal to 50% of the first $10,000 of qualified wages per employee. So again, it's capped at $5,000 per employee or 50% of their wages, and that credit of $5,000 maxes out per employee for the entire year. So initially, the credit was only for 2020 and it was limited in scope per employee, only $5,000. But then there were two new acts because COVID lasted longer than we hoped for. The Consolidated Appropriations Act signed by President Trump in December of '20 and the American Rescue Plan Act in February of '21 signed by President Biden which modified the credit and created increased tax benefits.
And to understand the trajectory as Alan said, the PPP loans have gotten more restrictive on who's eligible, whether it's the employee count or the revenue test. For Employee Retention Credit, it's the exact opposite. They're opening it up to more employers and making the benefits even greater. So now, the Employee Retention Credit is available to all recipients of PPP loans. This is again, the biggest change and eligible employers can now claim the Employee Retention Credit on any eligible wages that were not used to support their PPP loan forgiveness application.
And again as you'll see down below, this is actually retroactive to March of 2020. So back in March 2020, you were not able to do both PPP and ERC, but that law changed in December. And it's not only prospectively, it's retroactive back to March of 2020. So for the test, obviously, it's one credit the Employee Retention Credit, but it really has to be looked at almost as if it's two separate credits because the rules and the math are very different between the two years. So in 2021, the gross receipts the client has was reduced to 20%. And for 2020, you needed to drop to 50%.
Now it's only 20%. So that will open it up to a lot more employers. The amount of the credit has also changed. The credit has been increased to 70% of the first $10,000 of qualified wages for each employee per quarter. So again, in 2020, it maxes out of $5,000 per employee for the year. Now it maxes out at $7,000 per employee per quarter. I can't stress this enough, this is real dollars. If you're eligible in all four quarters in 2021, you could be getting a credit of up to $28,000 per employee. And one item as you'll see later whereas great as the Employee Retention Credit is, it's not as valuable as the PPP loan and any money used with PPP proceeds that's granted forgiveness because no expense deduction is allowed for wages equal to the amount of credit claim.
So if you get a credit for wages, you lose that deduction for wages on your tax return filing. Now, let's talk very briefly about aggregation rules. We could spend probably a whole day on this, but this is critical when assessing eligibility for the Employee Retention Credit, just because it sets the table, if you don't do this test and do everything else after and then come back to this, you may have wasted your time. This is the table setter of whether you're eligible. The basic premise is you have to look at the aggregate group. Not each company is looked at in a silo, you have to look at common ownership.
And when you do that, it could work to your benefit or disadvantage. So it's either to determine whether there's a partial government shutdown which we'll get to or decline in gross receipts, and affiliation rules, they cover parents subsidiary controlled groups which for purposes of this credit, it looks at 50% common ownership, brothers, sister controlled groups, combine groups of corporations, affiliated service groups. Again, so you need to look at this in an aggregate, all companies that have common ownership. I never in my life probably asked my clients for org charts more often just to gauge this test.
Conditions giving rise to the Employee Retention Credit, there's two buckets, and you do not have to meet both, it's one or the other. In the first bucket, you can qualify based on a government shutdown that limits commerce, travel or group meetings. If you meet the test in this bucket which is more applicable in 2020, you are eligible for the Employee Retention Credit for the period of the shutdown. If you're shut down by government order, there is no gross receipts test, you qualify. Again, it's beyond the scope of this webinar as to what exactly qualifies for a shutdown.
The other test is if you experienced a significant decline in gross receipts. During the calendar quarter when compared to the same quarter in '19. And again, as previously mentioned, the test changed. You needed a decline of 50% for 2020 and 20% for 2021. The key thing to keep in mind is the base year that you're always comparing to is 2019 and the thought process is because that was our last, "normal year" pre-COVID. In terms of receipts, make sure to calculate it based on the same method you file your tax returns. To file your tax returns on a cash basis, your gross receipts decline should be calculated on a cash basis.
And just the two periods again for 2020, March 13th, again, it didn't start on January 1st of 2020, it started on March 13th. Through the end of 2020, you need a 50% decline in gross receipts. And as my colleague will walk through shortly, you don't need to maintain that decline of 50% for subsequent quarters. You just need to maintain at least a 20% drop, and you'll see that visually, very shortly. And then in 2021, the test is decreased as a side from 50% to 20%. One thing to keep in mind is that test for 2021, the 20% decline, there's two options.
You can either qualified based on that quarter, or the look back of the previous quarter. Just as a quick example, if you look at Q2 of 2021 which we just started, you compare Q2 receipts of '21 to Q2 receipts of '19. If you meet that, you're good. If you don't meet that, you can look back to Q1 of '21 and compare that to '19 of Q1. So there's two alternatives for every test, and you only have to meet one or the other. I'm going to turn it over to my colleague Carey now just so he could walk you through visually what this could look like.
Carey Gertler:Thank you very much. So as Oren had said, he went through the technical aspects of the gross receipts test for 2020 and 2021. And we feel that sometimes it's good to visualize it so we can put it in the appropriate buckets. So in this example, we see that in the first quarter of 2020, compared to the first quarter 2019, we have a 15% decline in our gross receipts. Second quarter, we have a decline of 67%, more than the 50% that we need to be eligible for the Employee Retention Credit.
So under this fact pattern, we start to be eligible for the Employee Retention Credit in Q2 of 2020. Now we evaluate Q3 of 2020. We compare Q3 2020 to 2019. And we see that we have a 40% decline in our gross receipts. Under the 50%, but more than 20% as Oren had mentioned. So we are still eligible for the Employee Retention Credit for the third quarter of 2020. Now we go to the fourth quarter. We see that we have a 14% decline. So less than 20, less than 50, but we are still eligible for the fourth quarter because you always get the next quarter in 2020.
So the core that you're eligible for in the next quarter. So under this example, the period that were eligible for the Employee Retention Credit under the gross receipts test is from April 1st 2020 to the end of the year, December 31st 2020. Using the same example for 2020, our first quarter numbers are the same, or second quarter numbers are the same as a decline in grocery seats. However, in the third quarter of 2020, we have a 12% decline in gross receipts, and then the fourth quarter we still have the 14% decline.
So what this indicates is that we're eligible for the Employee Retention Credit for the second quarter of 2020. We're eligible for the third quarter of 2020 based upon being eligible in the prior quarter, but now it stops because we did not have at least a 20% decline in gross receipts. So in this example, we're only eligible for the Employee Retention Credit in the second quarter of 2020 and the third quarter of 2020, not the fourth quarter. Here's an example for 2021.
In the first quarter of 2021, compared to the first quarter of 2019, we have a 25% decline in gross receipts. Second quarter, we only have a 17% decline. In the third quarter of 2021, we have a 40% decline in gross receipts and the fourth quarter, we have a 14% decline. So interpreting these numbers is that we're eligible for the Employee Retention Credit in the first quarter of 2021 based upon a quarter to quarter analysis. As we move to the second quarter, if we were to compare the second quarter of 2021 to 2019, we fail under the first option to be eligible for the Employee Retention Credit.
However, if we look back under the optional testing period, we're able to compare the prior quarter information to the prior quarter. So in this case, for Q2, we look at Q1 of 2021 compared to 2019. We're eligible in that quarter, so that makes us eligible for the second quarter. So in this fact pattern, we're eligible in the first and third quarter based upon the gross receipts tests and by doing so, we're eligible for all four quarters for the Employee Retention Credit if we're looking at using the optimal period to measure our gross receipts. So that is a visualization of how the gross receipts test works. Now, I'll pass it along to Oren.
Oren Glass:Thank you Carey. And just to clarify one more time because I'm seeing a number of questions about it. Again, in 2021 in any quarter, there's two options. You compare either that quarter to the same quarter in '19 or you could do the look back of the prior quarter compared to that same quarter in '19. So just discuss briefly for there's an employee count which we'll get to the significance of shortly, the way you calculate your employees, it's not the same as how you calculate the employee count for the PPP.
So for purposes of the Employee Retention Credit, if you're calculating only full-time employees, that's defined as any employee in any 2019 calendar month that had an average of at least 30 hours of service per week or 130 hours of service in a month. So an employer that operated its business for the 2019 calendar year determines that number identified in the first step, it's full-time employees per month, a sum the 12 months, and then divide by 12 to take the average. So it's an average headcount, not total employees. And as we'll see, the key here is if you have a certain amount, if you have a ton of part-time employees, you get the credit on them, but it doesn't hurt you on the employee count.
So again, just the Employee Retention Credit, it's available to all employers, but the math works very differently based on your employee count. The number of employees will determine the amount of eligible wages. It does not determine that if you're eligible or not, it determines the amount of eligible wages and the employee count has two separate thresholds. Now, the key here is which I've seen some confusion over that the headcount that dictates your ability to take the credit is 2019. For both years, when you calculate the 2020 credit, and the 2021 credit, you're looking at your 2019 full-time employee count.
However, one distinction between the two years is when you're doing the 2020 credit, you look at your 2019 employees and you have to look at whether you're over or under 100 full-time employees. When you do the 2021 test, again, you're also looking at headcount 19, but when you get that number, it's now up to 500. So the threshold has been increased from 100 in 2020 to 500 in 2021. Again, the base period you're calculating the headcount on remains 2019. What is the significance of these thresholds?
If you're under the threshold which is either 100 or 500 as indicated above, you're eligible to take the credit on qualified wages paid to all employees whether they're providing services or not. If you're over the threshold, for example, let's say you're over 500, and you're doing the 2021 test, the credit is only available for qualified wages paid to employees not providing services. So again, you're eligible for the credit, but if you're over the threshold, the math is very different and the credit could be severely limited, if not limited completely. But again, thing to keep in mind is you could be over 500 employees in '19, but still be eligible for the credit on all their wages if when you calculate the headcount of full-time employees is under 500.
Oren Glass:Okay, so I was hoping for a better percentage. But so the answer here is actually both A and B. So I guess I'll give credit to the people who said A or B. But the correct answer is A and B and the reason is because if you're less than 100 or 500, you're still eligible for the credit, it's just the math may be different. If you're over or under any threshold, you still eligible for the credit, but the amount of the credit may be severely limited. Just a couple of quick items on qualified wages. It's wages and compensation paid by an eligible employer and it includes it's not only pure wages, it includes other items like health insurance for your employees.
There are certain wages that are exempt from this credit which would be any wages that are exempt from FICA which would be an example would be family leave, paid sick leave. Again, outside the scope of this webinar, but there's other credits available there too, whether it's on the family leave and paid sick leave or an opportunity, work opportunity credit.
Carey Gertler:Oren, I think one thing to note is that you can't take the same credit on the same dollars. So if you're using it for another credit, you can't use it for the Employee Retention Credit.
Oren Glass:Thank you Carey, and correct. And what we'll get too in the interplay between the PPP and the ERC. But yes, you can only designate one the same dollar for one of these items. A key thing that I see in the chat we're getting a lot of questions on is what if I'm an owner of the company. Are my wages eligible for this Employee Retention Credit? And the rule right now is compensation of owners, whether if it's C-corps or shareholders, owner of an S-corp or partners, owners of a partnership or a single member LLC that own more than 50% of their company are not eligible for this credit.
Carey Gertler:So Oren, I just want to clarify, you have to have wages that are on a W-2? So if you're a member or an LLC, or a partner that have a share of ordinary income on a K1 or a guaranteed payment, those are not eligible for the Employee Retention Credit?
Oren Glass:Correct. It's pure wages and same would go, just like the PPP, you cannot take the credit on payments made to independent contractors that would go on a 1099. And lastly, well, someone asked me, "Well, I can't take the credit on my wages because I own more than 50%. Let me just start hiring all my relatives." Well, no, you can't do that either because you're not eligible for the credit on wages paid to relatives that are related to the more than 50% owner. IRS gives a whole list of who's considered a relative, a couple examples are parents, kids, stepbrother.
So there's a number of parties that the IRS is looking at to make sure you're not taking on the credit on wages for relatives who are related to someone who owns more than 50% of the company. And now I'm just going to turn it over to my colleague Carey who's going to discuss the value of the health insurance when it comes to the Employee Retention Credit.
Carey Gertler:Thank you Oren. So here's another example to visualize what we just discussed. So we have enough employer who has a restaurant and this fact pattern, was less than 100 full-time employees in 2019. The business as everyone knows typically it was partially shut down due to a government order from April 6, 2020 to May 31st 2020. The only thing that they were able to do during that period of time was takeout service and during that time, due to the decrease in business, the restaurant only paid 60% of the employee's wages to them.
But they paid 100% that the health insurance premiums on each of the employees, for this example is $150 per week per employee. So we have two employees, David and Stephanie, each have a gross pay of 1,500 and $2,000 accordingly. Their wages for the period that we're talking about April 6th to May 31st are 12,000 and 16,000 on a gross basis. And what I said, the company is only paying 60% of their wages, basically reducing their wages. So that turns out to be for David 7,200 and 9,600.
In addition, the company has paid their health insurance $150 a week for eight weeks. So that's another $1,200 that the company has paid. If we add these two columns, C and D, that gives us what we call qualified wages for the Employee Retention Credit. So for David, we have 8,400, and for Stephanie, we have 10,800. So as we move to the qualifications as Oren had said initially or previously, you max out for qualified wages at $10,000. So for Stephanie's situation, we max out at 10, so we use the $10,000, not the 10,800 to determine the credit.
So $10,000 times 50% because we're talking about a 2020 credit, give us a credit for Stephanie of $5,000. For David, since he did not reach the maximum $10,000, we use the actual qualified wages which is 8,400 times 50% is $4,200. So for these two employees, the company is entitled to a credit of 9,200 because they were under 100 full-time employees for 2019. Now, if we were to change the fact pattern slightly, and let's say the employee of the restaurant had more than 100 full-time employees in 2019 and we assume the same facts, David's working and Stephanie is not working, the company would only be entitled to a $5,000 credit because we exceeded the threshold for 100 employees, we only used to qualify wages for people not providing services.
In this case, it was Stephanie of only $5,000. So as Oren had said, you could be limited in your opportunity to claim a credit based upon your employee count. That's why it's very important to make sure you have accurate numbers. So something new that got created in the most recent legislation that was signed by President Biden under the American Rescue Plan Act. So in order to be eligible for the Employee Retention Credit, you had to have been in business in 2019. However, they were businesses that started in 2020. And because of this, they weren't eligible.
So the new law created a carve out for what they call recovery startup businesses which basically means it's a business that started after February 15th 2020. Another requirement for this credit for startup business is you had to have gross receipts of $1 million or less in 2020. Now, because this is a carve out, and there's not a full calculation that can be done, you're still eligible based upon the testing whether it's a gross receipt and or a partial or full shutdown. But your eligibility is only for the third and fourth quarter of 2021. And you're limited per quarter of only obtaining a $50,000 credit.
So if you were in business in 2019, there is no limit, no upward limit on the credit you can apply for and obtain, but if you're a recovery startup business, you're maxed out at $50,000 per each quarter of the third and fourth quarter of 2021.
Carey Gertler:So 49.4% said both A and B. So the answer is B, 20%. So which of the following includes part-time employees in the calculation? Okay. You don't count part-time employees for the eligibility which is the count, the 2019 employee count, but they are included if you're eligible in the Employee Retention Credit calculation. So the answer is B. All right, the PPP and the ERC interplay. We want to take a look at the values of these two programs. Like everything else, not all things are created equal.
We are in a unique economic landscape, the government is providing real dollars to help company. The goal should be to try and take advantage as much as possible these two programs. Every $1 of PPP forgiveness received is $1 in your or the taxpayer's pocket. Why? Because expenses are fully deductible and the loan forgiveness is excluded from income, Win-Win scenario. Now, the ERC, the Employee Retention Credit. Every $1 of employee retention is not $1 in your pocket.
Basically, the Employee Retention Credit money is taxed and what I mean is you're not entitled to a deduction for the salaries and wages for which you are taking the credit, thereby increasing your taxable income, thereby you tax affecting the dollars that you are receiving. You still end up in a positive cash flow position, but not as rich as the payroll protection program. So but if you can add these two programs together and maximize your benefit, you're looking at real dollars. Now, let's talk about optimization. How can we do both of these?
First of all, you really need to determine your eligibility for both the Employee Retention Credit and the PPP. If you are not eligible for the Employee Retention Credit, these planning opportunities would not be relevant to you because there is no need to minimize or maximize certain amounts. Next, you need to consider what we call the optimal covered period. Now, as Alan had mentioned, the cover period begins the date the fund is received and can go either eight or up to 24 months. Now, that doesn't mean that you have to use the period for which you start the money you got the funds, you just have to use a period within that covered period for the forgiveness.
This gives you the ability to plan for an optimal period to utilize expenses for both the PPP in the Employee Retention Credit. Some considerations that should be made to determine what is the optimal period, you should consider any salary reductions, any headcount reductions. If you extend the covered period and plan on using a period that you had a decrease in both of these items, there is a real possibility that you might not get full forgiveness on your PPP loan which is very key. If no headcount or substantial wage reduction, you want to choose the shortest cover period that allows you to use payroll to cover 60% of your payroll protection forgiveness or say it another way, we need to determine how you can optimize expenses that are considered non-payroll that allows you to use up to 40% of the payroll protection loan forgiveness.
We'll review in a couple minutes what makes up these expenses again. Alan had previously mentioned, but it's important to identify what falls in to the 40% bucket. Once you've considered payroll headcount, salary reductions non-payroll expenses and which cover period to use, eight or 24 weeks and which quarters you're eligible for the Employee Retention Credit or might be eligible for, then you can start choosing what period should I be asking for forgiveness. What makes the most sense for me to maximize these dollars. I know this sounds like a lot and it is.
Remember, every situation is unique and needs careful consideration. That's why if you haven't applied for forgiveness, you should consider all of your options before rushing to submit the application. As Alan previously mentioned, you have 10 months to apply for the forgiveness based upon the end of your cover period. We've put together some examples to help illustrate our points.
Alan Wink:So Carey, let me take the first example and I think based upon some of the questions I see coming through the chat, I think this simple example will answer a lot of people's questions relative to the length of the cover period in terms of choosing the optimal period. One thing to remember as we've mentioned several times during this presentation, there is no double dipping. So you do not qualify for the ERC for those periods when you're using wages or salaries to support the PPP loan forgiveness application. So let's give a simple example here.
Let's assume the borrower received the PPP loan on April 1st 2020. This borrower had no reduction in FTEs or in salaries greater than 25%. This business was shut down by government order on March 23rd 2020 and was allowed to reopen again on June 19th 2020. This business had gross receipts changed from 2019, remember the base year, with a 5% increase in Q1. 10% decline in Q2, 20% decline in Q3 and a 25% decline in Q4. This particular business had average full-time employees of 90 for 2019 and currently had full-time employees for 2020 of 110. So this business qualifies for the ERC because of the shutdown, they did not experience a 50% decline in grocery seats in any quarter of 2020 compared to 2019 and since they had less than 100 employees in 2019, they qualify for the ERC for all their full-time employees, 110 employees for 2020.
Now once again, so they do get it because of the partial or full shutdown test. So this particular company would want to take the Employee Retention Credit on wages paid from March 23rd 2020 through June 19th 2020 on all 110 employees. Now once again, this company would probably select a covered period of 24 weeks beginning on April 1st and going forward 24 weeks, but even though you select a 24 week covered period, you do not have to use your wages in all 24 weeks of the covered period. So this particular company would use wages for PPP loan forgiveness starting on June 20th, the day after the ERC ended and would continue out to the end of the covered period.
Now remember, for most companies, the calculation of the amount of your PPP loan was two and a half times of your average monthly payroll. So assuming that you didn't have tremendous declines in FTEs or salaries or wages, you can probably use up all that payroll for forgiveness in a 10 to 12 week period without even considering the non-payroll costs. So I think this is a pretty easy example of how you can maximize your PPP loan forgiveness and also maximize the amount of your ERC. Remember, in order to qualify for full forgiveness, at least 60% of the forgivable expenses must be spent on payroll.
In addition to salary and wages, payroll also includes employer paid retirement benefits, employer paid health and insurance benefits, any state unemployment insurance and any local payroll taxes. As Oren said earlier, when you calculate wages for the ERC, the only one of these expenses that is eligible to be included is your employer paid health insurance. And also, just one other thing to keep in mind that these additional payroll costs must accompany salaries for the same payroll period during your payroll forgiveness form.
We mentioned this earlier, but there are several non-payroll expenses which are also eligible for PPP forgiveness that you should certainly keep in mind when you're looking to maximize that 60/40 split of payroll and non-payroll costs. So the non-payroll expenses once again are mortgage interest, rent, utilities and the four expanded eligible expenses. Now these items as you know are not eligible for the ERC calculation.
Carey Gertler:Okay Alan, thank you. So we have another example here as we talked about the interplay of these two programs and maximizing. So Alan's previous example was to choose the optimal period. This example is to maximize expenses for the payroll protection program forgiveness and still get the Employee Retention Credit. So under this fact pattern, we received the PPP loan on April 1st 2021. We had no reduction in employee headcount or employee salaries and there was no government shutdown as in Alan's example.
Our gross receipts changed from a 2021 perspective to the 2019 numbers. So in Q1, we had a decrease of 25%, Q2 we had a decrease in 5%, Q3 a decrease of 22% and in Q4, we had an increase of 50%. So just going back to the rules, we actually qualify for the Employee Retention Credit based upon the gross receipts and a standalone basis in each of the four quarters based upon either looking at a quarter to quarter or the previous quarter. So for the fourth quarter, we're able to look back at the third quarter and we had more than 20% decline in gross receipts.
The next fact pattern is that our 2019 average full-time employee count was 490 employees and our current full-time employees for 2021 are 510. So what do we want to do? So the first thing we want to do is we want to make sure we take the Employee Retention Credit for the first quarter of 2021 because we're eligible based upon the gross receipts test. Now, our payroll protection program loan, we did not receive those funds until April 1st. So now, we need to analyze and evaluate how do we maximize our 40% bucket of non-payroll cost so that we can minimize the amount of salaries? And the reason why we want to minimize the amount of salaries to 60% is that we're eligible all four quarters of 2021 for the Employee Retention Credit.
So as Alan had said, we can't use expenses twice. So we want to try and minimize as much as we can in the forgiveness for salaries because the remainder of those salaries could be used to get the Employee Retention Credit potentially in each quarter. So it's important to evaluate what we can use, the more that we can use in the 40% bucket which means that the less we have to use in the 60%, but we can't go below a 60% threshold for using salaries and related costs. Now, taking the Employee Retention Credit is very valuable and so the sooner we can use those expenses under the 60% rule, the more time we will have after that period to claim the Employee Retention Credit.
It's also worth noting that any expenses that are not on our forgiveness application for the payroll protection program can be used for the Employee Retention Credit. An example would be one of the limitations under the payroll protection is that annualized salaries are limited to $100,000. If someone has more than $100,000 of compensation, the excess could be used for the Employee Retention Credit. So there's opportunities either before or after the covered period and even during the covered period to be eligible for the Employee Retention Credit.
Now, using the same scenario and just tweaking it a little bit, if in the third quarter of 2021, we only had a 5% decrease in gross receipts instead of 22%, what would that mean? That means we are not eligible for the employee retention in the third quarter or the fourth quarter. And if this were the case, we might not want to start our PPP forgiveness on April 1st. We might want to push that to July 1st assuming that we're within the 24 week period so that we can get the employee retention not only in the first quarter, but the second quarter.
So identifying and analyzing opportunities between the Employee Retention Credit and the PPP can be very beneficial if you understand the nuances, and because everything is changing on a daily basis, this is definitely becoming a more complicated matter.
Carey Gertler:So the answer for this question is D, 58% of you got it. You don't always want to seek the maximum forgiveness regardless of the Employee Retention Credit. You need to identify as it says in D, potential salary reductions and head counts which could be impactful in the calculation. So I know there's been a lot of questions submitted, we are at the top of the hour. We will follow up as we can with anyone's questions that they've submitted. Also, we have a resource for the firm. If you want to email questions or you have to have inquiries directly, you can email them to the Employee Retention Credit which is the email@example.com or you can email either the speakers today, Alan, Oren or myself, our contact information is listed on the page.
Transcribed by Rev.com
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