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  1. Home
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  3. IRS Issues New Guidance on PPP and Employee Retention Credit Eligibility

IRS Issues New Guidance on PPP and Employee Retention Credit Eligibility

Posted by Sarah Russell on March 3, 2021

Sarah Russell Sarah Russell

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
PPP and ERC Chart

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.

Contact Us

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.

Our team is always ready to help.

Please contact us for more information.

Sarah Russell

Sarah Russell

Shareholder, Tax

Contact Sarah   |   Read Sarah's bio

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IRS Issues New Guidance on PPP and Employee Retention Credit Eligibility

Posted by Sarah Russell on March 3, 2021

Sarah Russell

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
PPP and ERC Chart

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.

Contact Us

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.

Our team is always ready to help.

Please contact us for more information.

Sarah Russell

Shareholder, Tax

Contact Sarah   |   Read Sarah's bio

related news

Financial Management: 4 Key Technology Transformations

The accounting industry looks a lot different these days than it did 10 years ago. From shifts towards data-driven strategy to the implementation of new technological tools, the profession has…

Read full story

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Working with walls, light, shadow and the properties of a nearly endless array of building materials, architects and engineers create the spaces in which we live and work. Some are…

Read full story

How to Increase Tax Savings with a Roth IRA-Owned IC-DISC

Did You Know Combining these Strategies Can Help You Save Even More Tax Dollars? Many business owners may already be aware of the very popular tax saving strategies that exist…

Read full story

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In this episode of The Sound of Automation podcast, Frank Lashier III, COO of Dominion Technologies Group, Inc. joins us to talk about the challenges of transitioning a business within a…

Read full story

Clayton & McKervey Announces Appointment as Key Global Partner for the Centuro Global Network

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—April 5, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is pleased…

Read full story

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