Interaction Between Paycheck Protection Program Loans (PPP) and Employee Retention Credits (ERC)
March 15, 2021
By Alan N. Wink
Paycheck Protection Program Loans (PPP)
By now, most of us are familiar with the terms of the PPP loans created as part of the CARES Act. These loans can be totally forgiven as long as they are used for the intended purposes of payroll, rent, utilities, mortgage interest and/or certain covered operations expenditures, property damage costs, supplier costs and worker protection expenditures. The forgiveness of the PPP does not create gross income for the borrower and all expenses paid for with PPP monies are fully deductible for tax purposes.
Employee Retention Credits
The original CARES Act created a refundable payroll tax credit for employers that retained their employees during the period March 12, 2020 through the end of the year despite the economic impact of the pandemic on their business. For 2020, the ERC was capped at $5K per eligible employee, which is based on 50% of the first $10K of qualified wages. Originally, recipients of PPP loans were not eligible to claim the ERC. However, this all changed with the passing of the $900 billion Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law on December 27, 2020.
Tax Beneficial Provisions for PPP and ERC
The CAA states that retroactive to March 12, 2020, any employer eligible for the ERC can now claim the ERC, even if they also received a PPP loan. However, there are a few very important caveats. Eligible employers can claim the ERC on any qualified wages that are not counted in payroll costs when applying for PPP loan forgiveness. For the same quarter, payroll can be counted toward either ERC eligibility or PPP loan forgiveness, but certainly not both. All eligible businesses need to analyze their payroll costs on a quarterly basis, so they can attempt to get 100% forgiveness on their PPP loan and also maximize the value of their ERC. Determining the right length of the covered period between eight and 24 weeks is critical for maximizing the tax benefits of PPP and ERC.
ERC Becomes Even More Beneficial in 2021
As part of the CAA, the ability to claim the ERC was originally extended until June 30, 2021 and even on better terms for the employer. President Biden’s American Rescue Plan has further extended the ERC once again making this important opportunity available through the end of the year. For eligible employers, the ERC has been increased to $7K per quarter per employee, which is based on 70% of the first $10K of qualified wages per quarter. Qualifying for the ERC is also easier in 2021, since the gross receipts test for eligibility has been reduced from a 50% comparative quarterly decline to a 20% decline. Please do not confuse this with the 25% gross receipts decline when determining eligibility for the Second Draw PPP loans.