For businesses and individuals adversely impacted by the COVID-19 pandemic, much needed financial relief was provided when the Consolidated Appropriations Act, 2021 (CAA) was passed last December.
Key provisions of the Act affecting businesses:
- Paycheck Protection Program (PPP) – forgivable loan(s)
- Employee Retention Credit (ERC) – refundable credits against payroll taxes
The CAA also addresses the interplay for businesses that intend to claim the ERC in addition to the Research and Development (R&D) tax credit.
What happens if I have a PPP loan and wish to claim the ERC?
The CAA states that PPP borrowers can now deduct qualified PPP business expenses, paid from forgiven PPP loans, for tax purposes. The legislation marks a diametric change from a prior Internal Revenue Service (IRS) position regarding deductibility. However, PPP borrowers wishing to also claim the ERC need to proceed with caution since wages used to qualify for forgiveness related to PPP loans do not qualify for ERC. Therefore, to get the most out of ERC, it is recommended that businesses maximize:
- PPP forgiveness before applying for ERC (since it is forgivable) 1st
- Non-payroll expenses claimed in the PPP loan forgiveness application 2nd
The ability to maximize the non-payroll expenses in the PPP loan forgiveness application allows lenders to preserve wages for the ERC calculation.
Can I claim the ERC and still get the R&D credit?
Qualifying businesses looking to claim both credits need to be careful as wages used to claim the ERC are excluded from the calculation for the R&D tax credit. Businesses looking to claim both credits should take a thorough look at their qualified wages to ensure that they are maximizing the value they receive for both.
Analyze before you Act!
Ultimately, the CAA provided a slew of changes designed to help those who were financially impacted by the pandemic. For those looking to obtain forgiveness for their PPP loan as well as claim ERC and R&D tax credits, it is crucial to understand the interplay between PPP forgiveness and these credits and spend the time to analyze the qualifying wages to maximize their eligible benefit.
If you have any questions about the interplay between PPP, ERC and R&D Tax Credits, please contact us. We look forward to helping you analyze your qualifying wages and maximize your benefit.