The Paycheck Protection Program (PPP) was one of business owners’ favorite provisions within the CARES Act. At the same time, many employers overlooked the Employee Retention Tax Credit (ERTC) because they couldn’t claim the ERTC if they took a PPP loan. However, the Consolidated Appropriations Act (CAA) passed in December 2020 changed that, allowing smaller businesses to take advantage of both programs as long as certain eligibility requirements are met and rules are followed.
Many businesses have already used up their PPP loan funds to pay wages and other expenses while navigating the pandemic-related shutdowns and economic conditions. As businesses apply for forgiveness with their lender, there are strategies to consider for maximizing both your PPP forgiveness and your ability to claim ERTC.
In this article, we’ll review some of the most important things to consider in order to maximize both the ERTC and your second-draw PPP loan. First and foremost, it’s critical to note that there is no double-dipping. Businesses cannot claim a payroll expense as both an ERTC wage and a forgivable payroll cost on the PPP forgiveness application.
Businesses can utilize both PPP and ERTC
When Congress passed the CAA, it changed the game for businesses seeking relief. Beyond extending the time period for businesses to claim ERTC and increasing the credit to 70% of the first $10,000 in qualified wages for each employee in every quarter, the law allows PPP borrowers to claim both PPP and ERTC—however, it’s important to remember that qualified wages included on a PPP Loan Forgiveness Application are not eligible for ERTC.
Strategies to maximize ERTC if you have a PPP loan
If your business received second-draw PPP funds and qualifies for ERTC, be careful to not elect more payroll costs than necessary when completing your PPP loan forgiveness application. To maximize benefits from both the PPP and ERTC, make sure you use as much covered non-payroll costs as is allowed when calculating PPP forgiveness. If your business logs more payroll costs than necessary (more than 60% of loan proceeds) in your PPP forgiveness application, then you could miss out on opportunities to receive ERTC.
Every business and PPP borrower situation is going to be different. In general, businesses should consider the following when balancing second-draw PPP forgiveness and ERTC:
Study your expenses. The PPP requires that 60% of the loan proceeds are used for payroll which allows businesses to use the remaining funds for other eligible expenses including operating costs like electric, gas and internet bills; supplier costs including perishable goods or anything else essential to running your business; and worker protection costs like PPE, health screenings, or an expansion of outdoor dining. Businesses that can apply 40% of their PPP loan proceeds on eligible expenses might free up extra wages that could qualify for ERTC.
Check the time period. Carefully look at the time period you’re using for PPP loan forgiveness of those payroll expenses. For example, if you applied for the second-draw PPP loan in late January 2021 and got funded on February 16th and used up PPP funds on qualifying expenses by April 30, then your business could claim ERTC from January 1 through February 15 and then again from May 1 through the end of 2021. That’s why it’s important to look at the timing of your PPP loans–when it was issued and when the funds were used—so you can find blocks of time around that to claim ERTC. Basically, the shorter window you can use for your PPP forgiveness, the bigger window you’re creating for your business to claim ERTC.
Document everything. Whether receiving PPP loan proceeds, applying for loan forgiveness, or claiming ERTC, it’s critical for businesses to document everything. Experts recommend maintaining the following documentation: eligibility support, support for certifications, documentation for covered payroll and non-payroll costs for PPP forgiveness, and analysis of payroll costs applied for PPP forgiveness and ERTC.
Ask for help. Combining these programs isn’t always easy or straightforward. It’s important to ask your payroll service or financial advisor for help in determining the best way to maximize forgiveness and tax credits for your business situation. There are also differences between the programs in terms of how payroll costs are defined between PPP and ERTC. For example, full-time equivalent employees are defined differently and the rules for affiliation and aggregation are different.
How do the PPP and ERTC affect deductible expenses for U.S. federal income tax purposes?
Typically, a forgiven loan will qualify as income for tax purposes. However, Congress chose to exempt forgiven PPP loans for federal income tax purposes as have many state legislatures. Be sure to check state regulations to understand the treatment that applies to your business.
The ERTC wages used to calculate the ERTC credit are not tax deductible at the end of the year. In fact, claiming the ERTC reduces deductible expenses for federal income tax purposes because the deduction for qualified wages including health plan expenses is reduced by the amount of the credit. It’s important to read through all IRS Notices and guidance for employers claiming the ERTC. Experts also strongly advise businesses to consult with their financial advisor or payroll service to ensure compliance and your ability to maximize your relief.
Need help with ERTC?
Small businesses should be thinking about how to take advantage of these pandemic relief programs before they run out. How can your business maximize PPP forgiveness and ERTC? What’s the best way to conserve as much payroll as possible for ERTC? Can you identify and document covered non-payroll expenses for PPP forgiveness? What about guidance from the IRS? For more ERTC details, watch this on-demand webinar from Terry Kirby, Tax Filing and Compliance Manager at Asure: 5 ERTC Myths: Debunked.