The IRS issued highly anticipated guidance regarding the employee retention credit (ERC) on March 1. We have previously outlined how the Consolidated Appropriations Act, passed in December, permitted employers receiving a Paycheck Protection Program (PPP) loan to claim the ERC, although the same wages cannot be counted for both PPP loan forgiveness and ERC. It has been unclear how the PPP and ERC would interact and there were many questions about how loan forgiveness applications submitted before the change could impact which wages qualify for the credit. The recently issued guidance provides some answers.
PPP + ERC: Qualified Wages and Eligibility
The guidance indicates qualified wages reported on a PPP loan forgiveness application will be considered a “deemed election” out of the ERC. Specifically, the amount for which the eligible employer is deemed to have made the election is the amount of qualified wages included in the payroll costs reported on the forgiveness application. The election can be up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the forgiveness application, sufficient to support the amount of the PPP loan that is forgiven.
We are aware of situations where loan recipients reported expenses in excess of the forgiveness amount, and it was unclear if all payroll expenses reported on a forgiveness application would be ineligible for the ERC. The new guidance makes it clear that only the amount of payroll costs needed to support the PPP forgiveness amount will be considered for such an election.
The guidance also clearly states that only expenses originally included on the forgiveness application will be considered. Therefore, if a PPP loan recipient only included payroll costs on their forgiveness application, they cannot go back and recast the application to include other eligible expenses that were omitted, in an attempt to save the wages for the ERC.
For example, if a taxpayer had a $1 million PPP loan, and submitted a forgiveness application including $1.1 million of payroll costs and $400K of other eligible costs, the taxpayer could take the ERC on up to $500K of qualified wages. This is because the minimum amount of payroll costs needed for forgiveness is 60% of the loan, or $600K. If the taxpayer excluded the other eligible costs, only $100K would qualify for ERC.
PPP + ERC Eligibility Example
The guidance also allows the ERC to be claimed on wages that were not considered qualified wages for purposes of PPP loan forgiveness. This means taxpayers have the potential to qualify for the ERC on the amount of wages in excess of $100K that could not be considered in the loan forgiveness application.
If you think you might qualify for the ERC in 2020, we can help you navigate these rules and maximize the credit and loan forgiveness. Call us at 248.208.8860 or reach out today to learn more.