Delaying PPP Forgiveness Applications to Optimize an Enhanced Credit

One of the many provisions included in the latest stimulus bill was the “relaxing” of eligibility for taxpayers to claim the Employee Retention Credit (ERC). The ERC was introduced back in March of 2020 in the CARES Act and we highlighted it in an April 1 article. Originally, taxpayers were ineligible to claim the ERC if they received a PPP Loan, and because the PPP Loan often resulted in a greater benefit, many taxpayers went down the PPP Loan road and never expected to look back.  But as you attempt to leave 2020 in the rear view mirror, your tax professionals and Congress are attempting to drag you back in.

Under the new Consolidated Appropriations Act (the Act), taxpayers who received PPP Loans may now retroactively apply for and receive ERCs as well – for both 2020 and 2021! However, some confusing language and the promise of clarification to follow leaves us recommending to all our clients who have yet to apply for PPP Loan forgiveness to slam the brakes on those applications if there is a chance they may qualify for the ERC. A future article will discuss the ERC as it applies to 2021 payroll; the purpose of this article is to discuss the impact of this change on 2020.

Taxpayers qualify for the ERC if operations were significantly affected by COVID-19, defined as:

  • Taxpayers who had operations fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; and/or
  • Taxpayers who experienced a 50% drop in gross receipts compared to the same calendar quarter from 2019.

Those who qualify are further divided into two groups: (A) Taxpayers with greater than 100 employees in 2020 are only eligible to claim wages or health care costs paid to employees who were NOT working (i.e. those displaced by the pandemic). (B) Employers with fewer than 100 employees are able to claim it for employees who ARE working, as well as those who are not. In both cases, the eligible wages are capped at no more than $10,000 per employee.

Note: For 2021 periods, the 100 headcount cap is increased to 500 and the $10,000 total cap becomes a quarterly one. These changes do not impact 2020 periods, though.

A key restriction is that the ERC cannot be claimed on wages that also were used to generate PPP Loan forgiveness (you now can obtain both benefits, but any given outlay may only be used for one or the other). This seems straightforward, but the Act’s language creates some confusion regarding the mechanics and interplay between these two benefits – especially as it relates to the inclusion of payroll-related health care costs. Congress, as it often does, recognized that it created a linguistic mess, but didn’t know how to quickly fix it (or simply chose to punt) and instead instructed the Treasury Department to clean it up with clarification – quickly. Employers now know all the components of their 2020 wages, but until we see the forthcoming Treasury guidance, it makes sense to hold off filing a PPP Loan forgiveness application for a bit longer. Doing so may allow qualified wages and other eligible PPP loan expenses to be deployed in a manner that maximizes these benefits – a maximization that might be more cumbersome (or even unavailable) if the application is already filed.

We apologize for the brevity and lack of details in this article, but we wanted to alert as many of our clients as possible that it may be in their best interests to delay applying for PPP Loan forgiveness. We will share more after receiving Treasury’s guidance.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.