PPP and the Employee Retention Credit (ERC)
New legislation from the Consolidated Appropriations Act, 2021 creates a chance for some companies to take advantage of both Paycheck Protection Program (PPP) loans and the Employee Retention Credit (ERC). Several changes specific to the ERC can provide an opportunity for additional relief for companies. The significant changes that affect small businesses include:
- Extension of the ERC through June 30, 2021
- Increased credit rate from 50% to 70% of qualified wages
- Increased the limit on per-employee qualified wages from $10,000 for the year to $10,000 for each quarter
- Reduced year-over-year gross receipts decline from 50% to 20%
- The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees
- Created a safe harbor to allow employers to use prior-quarter gross receipts to determine eligibility
The legislation means that employers who receive PPP loans may still qualify for the ERC retroactive to March 13, 2020.
Previously, clients receiving a PPP loan during the first round of relief couldn’t take advantage of the ERC. However, with the new legislation, a business can take the ERC even if they received PPP funding and loan forgiveness as long as the payroll identified for the ERC was not paid out of PPP funds. As noted above, this change is retroactive to March 13, 2020. It is important to note that to the extent that the ERC is claimed, the employer’s aggregate tax deductions are reduced by the amount of the ERC on the employer’s federal income tax return.
Companies may not be aware of this planning opportunity. It’s also a chance to take full advantage of relief options. And the time to do so is now — which will probably require amending the year-end payroll filings, especially if companies haven’t applied for PPP debt forgiveness. Companies can still claim the ERC if they’ve received forgiveness, but planning will be simpler if companies haven’t applied yet. Currently, we are waiting for additional specific IRS guidance needed to implement these provisions.
Specifically, the bill allows eligible entities to claim the prior quarter’s credits from 2020 in the quarter in which the bill was signed: the fourth quarter of 2020. The ERC is a fully refundable payroll tax credit for employers that, for 2020, is equal to 50% of qualified wages employers paid beginning March 13, 2020. Businesses are eligible if:
- They were fully or partially suspended due to an order from a governmental authority limiting travel, business and meetings during the quarter of payroll not paid out of PPP funds, or:
- The business had a reduction in gross receipts of 50% or more during a calendar quarter compared to the same calendar quarter in 2019.
When the covered period for PPP loans was extended to 24 weeks, many companies’ applications for debt forgiveness qualified for 100% forgiveness on payroll alone without considering the other eligible nonpayroll costs. However, those other costs now may play a big role in receiving the ERC benefit. For the forgiveness calculations, analyzing the ratio of payroll and nonpayroll costs is a critical step, especially with the expansion of additional categories of qualified non-payroll expenses. If sufficient nonpayroll costs are available, limiting payroll costs to the 60% threshold required for full forgiveness may allow the remaining payroll to be eligible for the ERC-provided relief.
For businesses with fewer than 100 employees, the credit applies to all employee wages paid. For clients with more than 100 employees, there are further restrictions in analyzing the ERC opportunity. The ERC requirements for qualified wages and business activity for 2020 are different than for the ERC on wages paid in 2021. It is important to understand the specifics and how they may affect businesses that obtained PPP loans.
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