Businesses that received PPP loans can now apply for the ERTC by subtracting PPP 1 and PPP2 loan amounts from their tax credit calculations, On average, companies that received PPP loan forgiveness can claim an Employee Retention Tax Credit refund of $5,000 to $10,000 per employee.
When the ERC when first introduced in Coronavirus Aid, Relief, and Economic Security Act (CARES Act), eligible employers had to choose whether to apply for a Paycheck Protection Program (PPP) loan or the Employee Retention Credit (ERC).
Through the Disaster Tax Relief Act, Taxpayer Certainty and Tax relief Act, American Rescue Plan Act, and the Consolidated Appropriations Act, many adjustments were made to allow PPP loan recipients to claim this fully refundable tax credit.
While no double-dipping of PPP wages is allowed when calculating ERC-qualified wages, any company that received a PPP loan may qualify for the ERC.
Concerning IRS Notice 2021-20, section I, PPP borrowers are permitted to use the payroll costs on the PPP loan forgiveness application as qualified wages for the ERC, provided that the amount is not required for loan forgiveness.
Hence, if you used payroll to apply for forgiveness for the first draw PPP loan in 24 weeks, it is not a limitation to you being an Eligible Employer in succeeding quarters. Also, if the PPP forgiveness allocated to wages is lower than the total wages, the wages in that quarter can be regarded as ERC-eligible. However, this is limited to the inclusion of $10, 000 of qualified wages per employee.
Ensure to include the payroll costs used for PPP loan forgiveness as income in the gross receipts test. While the ERC covers wages paid per quarter, the PPP might span from a quarter into another quarter. If the wages paid to an employee were also used for PPP forgiveness, the taxpayer might not claim the ERC.
The wages paid to employees before and after the PPP loan covered period that wasn’t utilized can be used by an Eligible Employer for PPP loan forgiveness. Additionally, some covered period wages can be used for the ERC, resulting from various limits that apply. The period used for calculating the maximum loan amount is shorter when compared to the PPP loan covered period.
The government set up the paid leave tax credit under the Families First Coronavirus Response Act. The program qualifies employers who are asked to produce a coronavirus-paid leave for a tax credit equivalent to the amount of the paid leave wages.
You are permitted to claim the Employee Retention Credit, apply for the Paycheck Protection Program, and claim the FFCRA paid leave credit; one thing you cannot do is double-dip.
You can’t claim the Employee Retention Tax Credit (ERTC) and the paid leave credits on the same wages. This is because paid leave credits can only be claimed on paid leave wages, and the Employee Retention Credit cannot be claimed on FFCRA-paid wages.
Peradventure, you collected a Paycheck Protection Program (PPP) loan, as well as the paid leave credits, under the PPP loan forgiveness. In that case, the paid leaves wages are not regarded as eligible “payroll costs”.
Also, if you have collected a Paycheck Protection Program and received paid leave credits, note that under the PPP’s loan forgiveness, the paid leave wages are not regarded as eligible payroll costs. Hence, when asking for PPP loan forgiveness, do not count FFCRA-paid leave wages as payroll costs. It doesn’t count as a result of you claiming the paid leave credit on FFCRA paid leave wages.
Below are the current possible circumstances where an ERTC claim would be allowed:
- A member of a controlled group had received a PPP loan and another member wants to claim the ERC since the member did not receive a PPP loan.
- The proceeds of a PPP loan weren’t the source of the employer’s qualified wages.
- The proceeds of a forgiven PPP loan were the source of the employer’s qualified wages, and the forgiveness wasn’t gotten through the same wages that will be utilized ad ERC-qualified wages.
Lots of businesses that had earlier received one or two PPP loans across the country have qualified for the ERC by following some of these metrics. Numerous governmental orders could have influenced your business operations during particular periods, and this could make way for you to qualify.
To be an eligible employer, you must have run a business or trade in 2020 or 2021 and paid qualifying wages to W2 employees. Recovery startup businesses are only eligible to claim ERC for the third and fourth quarters of 2021. To maximize your Recovery Startup Credit, you’ll need have paid qualifying wage to at least 7-8 W2 employees in 2021.
Also, to be eligible, you must have fully or partially suspended your business operations in 2020 or 2021, specifically due to governmental order.
Gross Receipts Test
According to recent IRS guidance, another to qualify for this payroll tax credit is prove having a significant decline in your gross receipts in 2020 or 2021 compared to the same quarter in the previous year. The rule is at least a 50% decline in 2020 or 20% in 2021.
PPP vs ERC
These three factors differentiate Payroll Protection Program and Employee Retention Credit.
- The kind of funding
- The time the business receives funding
- The cost of the program
For the PPP, the funding is sent through direct deposit into the business’ bank account. This disbursement usually occurs about a week after loan approval.
With ERC, the business receives the credit during its quarterly Form 941 filing. The ERC is received against payroll taxes employers collect from employees during the payroll processing.
You must repay the PPP loan together with its interest, notwithstanding if you later qualify for forgiveness.
On the other hand, the Employee Retention Credit (ERC) doesn’t require repayment. This is because it’s a refundable tax credit given to eligible employers who retained employees during the coronavirus pandemic. Eligible employers who the pandemic made to experience economic hardship and still managed to retain their employees’ salary at pre-pandemic levels are qualified to access the credit.
Application for a PPP loan by a business is at no up-front cost. However, it might cost you a lot if you don’t spend the loan based on the loan terms. Also, there is no cost for ERC. The credit is a disbursement you take after completing your quarterly tax return. It might only cost you if you pay to file your tax forms.
You can be completely forgiven for a PPP loan. The forgiveness is dependent on your incurred eligible expenses during your covered period. This covered period spans the initial eight weeks or, in some cases, the initial 24 weeks after you receive the loan. This implies that the entire loan is 100% forgivable, and you might not have to repay a dime of it.
The expected time to submit the forgiveness application is ten months following the conclusion of your covered period. You are not required to make any payments on the loan during this period. On the other hand, if you exceed ten months, you will be required to start paying back some of the loans in the process of applying for forgiveness.
Based on your payroll cost during your covered period, nothing less than 60% of the loan has to be forgiven.
Also, 40% non-payroll cost is the highest that can be forgiven. Instances of non-payroll costs are mortgage interest, rent, property damage costs, some operation expenses, worker protection expenditures, and supplier costs.
The 24-week approach may not apply when a taxpayer qualifies for the credit for two consecutive quarters during a PPP-covered period. It is crucial to use non-payroll costs like rent, mortgage interest, and others to increase the number of costs overstayed on the PPP forgiveness application you want to use for the two-quarters of ERC. At the ERC calculation, the wages limited for PPP are available for employees earning over $100,000.
For both ERC and PPP, Employer-Provided Health insurance is made available. You can also review qualified wages not paid in a PPP-covered period to check if they can still qualify for the ERC.