COVID-19 Relief Act opens back door to Employee Retention Credit (ERC) and loan forgiveness under the PPP
By James W. Cole
In the recent COVID-19 Relief Act the government provided an opportunity for businesses to retroactively qualify for certain employee retention credits (“ERC”) even if they utilized the PPP loan program. When the CARES Act was enacted last March, businesses were presented with two principal choices that encouraged keeping people employed: utilize the PPP loan program with expectations of loan forgiveness to fund employee payroll and certain overhead expenses OR use the ERC to qualify for a refundable credit of 50% of qualified wages (limited to $10,000 per employee). Most small businesses that qualified for the PPP funding chose that route – under the assumption that the 100% forgiveness of the PPP loan was more beneficial than the 50% ERC. Thus, many small businesses have not given much consideration to the ERC program.
Of course, no one really knew where we were headed and for how long the pandemic and economic disruption was going to last (frankly – we still don’t). The PPP program went through numerous changes and many businesses have filed or are just now finalizing their loan forgiveness application.
However, under the new relief provision, these businesses may now be able to get PPP loan forgiveness AND qualify for certain ERC wage credits. Like many aspects of these relief programs, the law passed with general concepts. Final guidance, rules and regulations will follow and we await further information to be able to provide clear direction to you.
One aspect is clear – you cannot use the same qualified wage dollar for the PPP loan forgiveness and for the ERC. That sounds simple but it really is not. Because the PPP covered period was expanded to 24-weeks from the original 8-weeks, many businesses paid more wages during the 24-week period than their PPP loan amount. Therefore, the initial belief is that the business may be able to use some of the wages for the credit and other portions for the PPP loan forgiveness. Of course, they must meet certain conditions to qualify for the credit.
WHAT TO DO NOW?
As we await further guidance on how to maximize the potential dual benefits, we recommend that businesses accumulate all the information needed for their PPP loan forgiveness application and work up a draft but not file at this time. In addition, the company should draft but not file their 4th quarter payroll reports to see if IRS modifications are made to provide the mechanism to claim the ERC retroactively or if amended Form 941 returns are required. IRS guidance is needed. In addition, further work is going to be required to determine if and how much that may be.
These matters are complex so please reach out to your BST advisor and we can talk about the availability and limitations that may apply to your company.
You can access prior information we published on the ERC here – the rules for 2020 remain relevant. In addition, the ERC has been expanded into the first six-months of 2021.