What is the interaction between PPP loans and the employee retention credit? Let us share what we know. The Consolidated Appropriations Act of 2021 (also known as the CCA) was passed by Congress late last December. Within this bill included a very tax-beneficial provision. This provision liberalized the interaction between PPP loans and the Employee Retention Credit (ERC). Prior to its passage, if an employer obtained a Paycheck Protection Program (PPP) loan, the employer was ineligible to claim the ERC.
However, under the new legislation, this ruling has changed. Now, employers that are eligible for the ERC can claim the that credit. Even if that employer has already received a PPP loan. However, there are certain circumstances for this to happen:
Employee Retention Credit Eligibility
- An 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 for PPP loan forgiveness can be applied to either of these two programs but not both.
Beneficial Tax Opportunities Available Between PPP Loans and the Employee Retention Credit
PPP Loan Forgiveness Denied
If an employer received a PPP loan and;
- included wages they paid in the second and/or third quarter of 2020; (this would be as payroll costs in support of an application. The application to obtain forgiveness of the loan – rather than claiming the ERC for those wages),
- and if the request for forgiveness was denied,
then the employer can claim the ERC related to those qualified wages retroactively. They can amend their Forms 941 for 2020. They do this by using Form 941-X. The form is called: Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Business Qualified but Never Claimed the ERC
If a taxpayer did not obtain a PPP loan but,
- qualified for the ERC in 2020
- and did not previously take the payroll credit
they can still do so by filing Form 941-X. Form 7200 cannot be used in this situation. This is because Form 7200 must be filed before the original 941 forms are filed. NOTE: Form 7200 is used to request advance payment of the credit.
The ERC is a government-sponsored program to keep workers employed. It is funded by providing qualifying employers with a refundable credit against certain employment taxes. For 2020, the credit is a refundable payroll tax credit equal to 50% of qualified wages. This is up to maximum wages of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid to any employee for 2020.
Examples of Benefits
Example 1
Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to Eligible Employer for the qualified wages paid to Employee A is $5,000.
Example 2
Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020, and $8,000 in qualified wages in Q3 2020. The credit available to Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2. While the credit is $1,000 in Q3. This is due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters of 2020.
No credit is available when an employer is allowed a Work Opportunity Credit with respect to an employee.
Please give this office a call if your business might benefit from this law change. Or if you have questions about other employer-beneficial changes to the ERC that aren’t covered in this article.
Day Trader: The Rules and Tax Treatment
