Jonathan Tretter, CPA
Would your business be eligible to retroactively claim the Employee Retention Credit (ERC) for parts of 2020, but you have already applied for and been granted full Paycheck Protection Program (PPP) loan forgiveness? If this applies to you, the IRS may have just extended the olive branch we have all been waiting for.
Notice 2021-20 published by the IRS on March 1st provides over 100 pages of guidance on the Employee Retention Credit as it relates to computing and claiming the credit between March 13, 2020 and December 31, 2020. Much of the guidance the IRS issued in the notice is not necessarily new information and much of the information is a repurposing of their Frequently Asked Questions (FAQs) published on the IRS website. However, about ¾ the way through the notice starting on Page 73, the IRS addresses the ever-important interaction of ERC with PPP.
Paycheck Protection Program and Employee Retention Credit Example Calculation
The situation that we are all accustomed to hearing is an employer that applied for PPP loan forgiveness with a 24-week covered period. They received a PPP loan in the amount of $200,000. On their PPP loan forgiveness application, they reported $450,000 of covered wages that were spent over the 24-week covered period. Until now, it was unclear if there was any relief available to that employer to carve out parts of that $450,000 excess covered wages reported on a PPP application and retroactively claim ERC for the overlapping time period of 2020. As instructed by the notice, what an employer is now allowed to do is only count the amount of qualified wages included in payroll costs reported on the PPP loan forgiveness application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP loan forgiveness application sufficient to support the amount of the PPP loan that is forgiven.
What exactly does this mean? Going back to the above example, if no other eligible covered expenses were included on the application with the $450,000 of covered wages, the employer has the option to apply $200,000 of those wages towards PPP loan forgiveness and apply the remaining $250,000 excess wages towards ERC.
In a different scenario, say an employer received a PPP loan for $100,000 and selected the 24-week covered period for loan forgiveness. On their application they included $150,000 of covered wages and $50,000 of other eligible covered expenses for forgiveness. In this scenario, the other covered expenses can account for 40% or $40,000 of the PPP loan forgiveness costs requiring a minimum of 60% or $60,000 of wages to be included towards PPP forgiveness. This would leave $90,000 of wages included in the original PPP forgiveness application now eligible for ERC.
However, in the above example, if no other covered expenses were included on the PPP loan forgiveness application other than $150,000 qualified wages, the minimum amount of wages needed for loan forgiveness is 100% or $100,000. Even if the employer incurred and paid $50,000 of other covered qualified expense during the 24-week covered period but did not include those expenses on their PPP loan forgiveness application, they are stuck with the application as submitted and cannot retroactively include those other costs to reduce the amount of wages needed for loan forgiveness. The notice also addresses more unique and specific scenarios regarding interaction with PPP and ERC that should be looked at on a case-by-case basis.
What is the takeaway?
The IRS issued the guidance we have all been waiting for, that provides optimism and opportunity for those employers who may retroactively claim 2020 ERC while also achieving full PPP forgiveness.
We urge you to consult with your tax advisor to explore whether or not you can benefit from this guidance. The Freed Maxick Tax Team is prepared to help you navigate through these tricky waters and we can be reached via the form below.