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By: Jeff Skolnick Uncategorized No Comments
EMPLOYEE RETENTION CREDIT INTERACTION WITH PPP GUIDANCE 

On March 1st, the IRS issued guidance on Employee Retention Credits (ERCs). I am zeroing in specifically on how the ERC interacts with the Paycheck Protection Program (PPP). 

The ERC was originally part of the CARES Act which was signed into law on March 27, 2020. The ERC allows eligible taxpayers a credit against Form 941 taxes (Federal withholding, Employer and Employee Social Security and Medicare taxes). The Consolidated Appropriations Act 2021 was signed into law on December 27, 2020 and made significant changes to the ERC. 

The original law had a provision which stated any employer that received a PPP loan was not eligible for an ERC. PPP was a better deal and that’s why PPP was in the news every day and there was little mention of the ERC. 

The new law changes the rules and allows employers that received a PPP loan to also receive an ERC. You must be careful.  Wages considered for PPP loan forgiveness may not be used for ERC purposes. 

Further, the law states that we are to assume this was always the law. Eligible taxpayers are able to file amended payroll tax Forms to claim the 2020 ERC. If you are filing an amended Form 941-X solely for the change in the law pertaining to the allowance of PPP borrowers to also obtain an ERC, then you can file one amended 4th quarter 2020 Form 941-X to correct all quarters of 2020. 

The guidance on ERC is set up in a series of 71 questions and answers stretching over 102 pages with only a small portion dedicated to the interaction of these two programs. As stated earlier, I will focus on this section of the guidance. The guidance amplifies the earlier position taken by the IRS. Employers that received a PPP loan and are eligible for an ERC may not use Qualified wages for the ERC that were used to obtain PPP loan forgiveness. 

If PPP loan forgiveness was denied, then the same wages can be used for the ERC, however, most employers are hoping for full forgiveness so let’s look at some examples of how this will work. 

There are 7 examples laid out in the materials which explain the position of the IRS. My summary of each follows. 

Example 1 – Employer receives a $100,000 PPP loan. The employer has $100,000 of ERC qualified wages during the PPP covered period and uses all $100,000 when applying for loan forgiveness, which is granted. Since all $100,000 was used for PPP forgiveness nothing is available for the ERC. 

Example 2 – Employer received a PPP loan of $200,000. The employer paid $250,000 of qualified ERC wages during the PPP covered period. When applying for forgiveness, which was granted, the employer submitted all $250,000 of wages. Since the employer only required $200,000 to achieve loan forgiveness, $50,000 is still available to be used for the ERC. 

Example 3 – Employer receives a $200,000 PPP loan. The employer has $200,000 of ERC qualified wages during the PPP covered period and uses all $200,000 when applying for loan forgiveness, which is granted. The employer also had $70,000 of other eligible nonpayroll expenses but did not submit them when applying for forgiveness. Although the employer is only required to have a minimum of 60% payroll costs ($120,000 in this example) since the employer did not submit any of these costs, they are deemed to have elected to use $200,000 of payroll and therefore nothing is available for the ERC. 

Example 4 – Same facts as Example 3, except the employer submitted $200,000 of qualified wages and the $70,000 of other eligible expenses. In this case the employer is deemed to have elected to use $130,000 of payroll costs and $70,000 of other expenses. This leaves $70,000 of payroll available for the ERC. Remember payroll costs have to be at least $120,000 and since other eligible expenses were only $70,000, payroll had to be $130,000. 

Example 5 – Same facts as Example 4, except that the employer paid $90,000 of other eligible expenses and submitted $200,000 of qualified wages and $90,000 of other expenses. In this case the employer is deemed to have elected to use $120,000 of payroll costs and $80,000 of other expenses. This leaves $80,000 of qualified wages available for the ERC. Again, keep in mind payroll costs have to be at least $120,000, therefore only $80,000 of other eligible expenses could be used. 

Example 6 – This example addresses an employer that had both wages qualifying for and not qualifying for the ERC. The example given for why there would be wages not qualifying for the ERC refers to a large employer (one that has greater than 100 full-time employees). These employers, if partially shut down, may only count the wages of individuals being paid and not working as qualified wages. Employees actually working are not counted. Employers with 100 or less full-time employees consider all wages as qualified wages during a partial shutdown. There is no distinction made between employees actually working and those that are not. 

In the example the employer receives a $200,000 PPP loan. During the PPP loan covered period the employer paid $150,000 of qualified wages, $100,000 of nonqualified wages and $70,000 of other eligible expenses. The employer is deemed to have elected $100,000 of nonqualified wages, $30,000 of qualified wages and $70,000 of other eligible expenses. This results in $120,000 of the qualified wages being available for the ERC. 

Example 7 – Same as example 6, but unlike the other 6 examples forgiveness is denied. In this case all $150,000 of qualified wages are eligible for the ERC. If PPP loan forgiveness was denied, then the same wages can be used for the ERC. 

As you can see from the examples you must be careful about the information being submitted for PPP loan forgiveness if you are also eyeing an ERC. Unfortunately, there are employers that applied for and received forgiveness before the new rules were in place and, in my opinion, are treated unfairly here. These were the most efficient of borrowers being punished for not submitting information that, at the time they applied for forgiveness, they had no idea was required. 

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Hang in there and stay safe, Jeff Skolnick, CPA, M.S. Taxation