Claiming Employee Retention Credits with a PPP Loan
February 3, 2021
In our previous article, we discussed the new enhancements to the Employee Retention Credit (ERC), compliments of the Consolidated Appropriations Act of 2021 (the Act). The Act extends the credit through June 30, 2021, providing further opportunities for eligible employers. The key modifications to the ERC resulting from the Act are:
- Retroactive eligibility for recipients of Paycheck Protection Program (PPP) loans.
- An increase in the maximum credit per employee from $5,000 to $19,000.
- An increase in the number of 2019 full-time equivalent employees (from 100 to 500) when determining qualified wages for 2021 credits.
- A reduction in the threshold for the evaluation of a significant decline in gross receipts when determining 2021 eligibility (from 50% to 20% of gross receipts as compared to the same quarter in 2019).
- A safe harbor that allows employers to use the prior quarter’s gross receipts to determine eligibility.
How does PPP loan forgiveness impact the ERC?
In a statement from the Internal Revenue Service (IRS), “[t]he eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.” The release of the new loan forgiveness applications on January 19, 2021, includes a provision to incorporate this change in guidance on a forward-looking basis. The revised loan forgiveness applications (Form 3508S, Form 3508EZ and Form 3508) note that a borrower should “not include qualified wages taken into account in determining the Employee Retention Credit.”
My PPP loan was already forgiven. What now?
As I previously noted, a business cannot “double dip,” or utilize the same wages to obtain PPP loan forgiveness while still benefiting from the ERC. However, the ERC was not available to PPP recipients prior to December 27, 2020. Accordingly, those businesses that applied for loan forgiveness would have included all eligible payroll costs paid or incurred during the covered period pursuant to the instructions in the loan forgiveness applications. Certainly, those businesses shouldn’t be penalized for already receiving forgiveness prior to this change in the law; however, this wouldn’t be the first time we’ve seen something like that with the evolution of the PPP.
On January 15, the American Institute of Certified Public Accountants (AICPA) sought clarification on this matter. In a letter to the IRS, the AICPA “recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does 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.” It is clear — additional guidance is imminent.
As we await clarification from the IRS, businesses who have already received forgiveness on their PPP loans should first evaluate their eligibility for the ERC. After concluding their eligibility, businesses should begin gathering payroll reports, government shutdown orders and financial statements to calculate and claim their credits.
Borrowers of PPP loans who have yet to apply for loan forgiveness have an alternative path; those businesses looking to leverage the ERC now have an additional element to consider in their evolving journey to loan forgiveness. This change in guidance further emphasizes the importance of an intentional strategy to maximize the benefits of both programs, but also leaves questions unanswered for borrowers who have already received forgiveness on their PPP loans.
Let Aprio help
Since the onset of the COVID-19 pandemic, Aprio has established a dedicated PPP and ERC team that is continuously monitoring new guidance impacting each of these programs to ensure we have the latest information when advising our clients.
To discuss your eligibility for the ERC and how we can help build a strategy to strengthen your balance sheet, contact Aprio’s dedicated PPP and ERC team for a consultation.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.