Aside from the second round of Paycheck Protection Program loans, the ERC has been one of the hottest topics to come out of the recent Consolidated Appropriations Act (Act) passed in December 2020. With good reason, as the credit can be worth up to $5,000 per employee for 2020 and $14,000 per employee for 2021. See our previous blog regarding changes to the ERC (including eligibility provisions) here for more information.

As noted in one of our previous blogs, the issuance of further guidance is necessary on how the PPP and ERC interact. The issue to note is that both programs imply that wages used to obtain PPP loan forgiveness cannot be used to calculate the ERC. Sounds simple enough, however the problem is that many PPP borrowers have used a 24 week covered period when applying for forgiveness. When using a 24 week period, PPP borrowers are required to report all eligible payroll costs incurred during that period, even if such payroll costs were in excess of the borrowers PPP loan amount.

Two questions that need clarification

Per the IRS instructions of Form 7200, Advance Payment of Employer Credits Due to Covid-19, “Employers can receive both a Small Business Interruption Loan under the Paycheck Protection Program (PPP) and the employee retention credit; however, employers can't receive both loan forgiveness and a credit for the same wages”. This leaves two question faced by PPP borrowers that need clarification –

• Are all the wages reported on my loan forgiveness application ineligible even though they exceed my original loan amount?
• How will the IRS ultimately allow early PPP borrowers who have already applied for forgiveness determine eligible wages? In many cases, early PPP borrowers who applied for forgiveness did not include non-payroll costs in an effort to simplify their forgiveness process. Had non-payroll costs been included, theoretically the PPP borrower would have allocated less of the loan towards payroll costs, thereby increasing the wages eligible for calculating the ERC.

What to do if you have already applied for forgiveness?

Wait for further guidance! In January the AICPA sent a letter to the Treasury department asking for further guidance on this issue. By amending returns now, there is a risk that the IRS may determine that all wages paid during the 24-week period are ineligible for the ERC.

Additionally, if the IRS is going to allow the taxpayer to “allocate” the loan amount among payroll and nonpayroll costs, what is the appropriate methodology? In both cases you could be either taking too much or too little credit.

What to do if you have NOT already applied for forgiveness?

If you have not already applied for forgiveness there are two strategies that you should be considering when applying for loan forgiveness.

• Maximize non-payroll costs reported on your PPP loan forgiveness application to minimize the amount of wages used for PPP loan forgiveness purpose.
• Shortening your covered period – In the recent Act, the PPP program was amended to allow PPP borrowers to choose alternative forgiveness periods as long as the covered period selected is a minimum of 8 weeks and a maximum of 24 weeks.

Using a combination of the above two strategies, PPP borrowers can maximize the amount of eligible wages for the ERC based upon current guidance by reducing the amount of wages reported on the PPP loan forgiveness application.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward. With a completely remote workforce our advisors are always available.