Last spring, the CARES Act created the ERC for businesses that were affected by the COVID-19 pandemic. However, the CARES Act disallowed the credit for businesses that received a Paycheck Protection Program (PPP) loan. Fast forward to December 2020, when Congress declared that businesses that had obtained PPP loans could also qualify for the ERC. In addition, Congress extended the availability of the ERC into the first two quarters of 2021, with a few new favorable provisions. The credit is refundable, which means that qualified businesses are able to get cash to the extent that the credit exceeds the payroll tax liabilities. The chart below outlines the terms of the ERC for both the original and extended filing periods:
How does PPP loan forgiveness impact the ERC?
In a statement from the Internal Revenue Service (IRS)
, “[t]he eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.” The release of the new loan forgiveness applications
on January 19, 2021, includes a provision to incorporate this change in guidance on a forward-looking basis. The revised loan forgiveness applications (Form 3508S
, Form 3508EZ
and Form 3508
) note that a borrower should “not include qualified wages taken into account in determining the Employee Retention Credit.”
My PPP loan was already forgiven, what now?
As I previously noted, a business cannot “double dip,” or utilize the same wages to obtain PPP loan forgiveness while still benefiting from the ERC. However, the ERC was not available to PPP recipients prior to December 27, 2020. Accordingly, those businesses that applied for loan forgiveness would have included all eligible payroll costs paid or incurred during the covered period pursuant to the instructions in the loan forgiveness applications. Certainly, those businesses shouldn’t be penalized for already receiving forgiveness prior to this change in the law; however, this wouldn’t be the first time we’ve seen something like that with the evolution of the PPP.
On January 15, the American Institute of Certified Public Accountants (AICPA) sought clarification on this matter. In a letter to the IRS, the AICPA “recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.” It is clear — additional guidance is imminent.
As we await clarification from the IRS, businesses who have already received forgiveness on their PPP loans should first evaluate their eligibility for the ERC. After concluding their eligibility, businesses should begin gathering payroll reports, government shutdown orders and financial statements to calculate and claim their credits.
Borrowers of PPP loans who have yet to apply for loan forgiveness have an alternative path; those businesses looking to leverage the ERC now have an additional element to consider in their evolving journey to loan forgiveness. This change in guidance further emphasizes the importance of an intentional strategy to maximize the benefits of both programs, but also leaves questions unanswered for borrowers who have already received forgiveness on their PPP loans.