Many of you with PPP loans may not know about Employee Retention Credits (ERC). Under the original CARES Act from March 2020, you were not eligible to benefit from both the PPP loan and ERC. The Consolidated Appropriations Act passed at the end of December 2020 now allows those with PPP loans to take advantage of these credits. An eligible business can claim an ERC for any eligible quarter in 2020 provided the same wages are not used for both programs. This change is retroactive to qualified wages paid after March 12, 2020. While it appears taxpayers may claim any missed credits, we are awaiting guidance from the IRS on the mechanics of that process and whether those who already filed for PPP loan forgiveness qualify.
Eligibility for Employee Retention Credits
For 2020, a qualified employer is permitted to claim a 50% credit on eligible wages paid up to $10,000 per employee. Eligible employers, under the 2020 definition, are limited to businesses that are fully or partially suspended because of a government order or employers whose gross receipts are less than 50% of their gross receipts for the same quarter the prior year.
Once a business qualifies for employee retention credits in a quarter due to a significant decline in gross receipts, they will continue to qualify until the first quarter following the quarter gross receipts exceed 80% of the same calendar quarter in 2019. Businesses that are fully or partially suspended because of a government order are eligible for the entire quarter; however, the only qualifying wages are those paid while the government order is in force.
Enhanced Employee Retention Credit Available Until June 30, 2021
In addition to the retroactive treatment for 2020, an enhanced employee retention credit is available through June 30, 2021. For 2021, the significant decline in gross receipts has been reduced to a 20% decline in gross receipts compared to the same quarter in 2019 or 2020. This version of the ERC allows for a maximum credit of 70% on up to $10,000 of qualifying wages per employee in each quarter instead of 50% on up to $10,000 of qualifying wages per employee annually. Businesses that cannot show a 25% decline in sales for the second draw of the PPP loan may have options when it comes to ERC in 2021. Even better, businesses that qualify for the second draw of the PPP loan may also qualify for ERC as long as the same wages are not used in each program.
The retroactive credits make for an interesting planning opportunity when applying for PPP loan forgiveness. Assuming a business is eligible to take advantage of the ERC in a qualifying 2020 quarter, a strategy could be to minimize the amount of payroll costs included on the PPP forgiveness application. It appears you would be able to utilize the ERC for qualifying wages in a quarter while adding as many non-payroll costs to the forgiveness application to maintain the minimum 60% payroll costs required for loan forgiveness. The timing of the PPP loan and the qualifying quarter for the ERC could also factor into whether a business elects the optional 8-week covered period or continues using the 24-week covered period for PPP loan forgiveness.
We are awaiting further guidance on how the ERC and PPP will interact and the requirements to benefit from both programs. We will continue to monitor the situation and provide more information as it becomes available.
For assistance with employee retention credits or additional information on the relief provided in the Consolidated Appropriations Act please reach out to your DHJJ contact.