During the past 14 months, Congress has passed numerous COVID-19 relief programs to support businesses, employees and individuals impacted by the pandemic. It can be hard to keep up since some of these programs overlap, have been extended and the rules keep changing.
In this article, I will share strategies for managing the interplay between the two biggest programs — PPP Loans and the Employee Retention Tax Credit.
As part of the COVID Relief Bill enacted on Dec. 27, 2020, and the American Rescue Plan Act enacted on March 11, 2021, Congress made big changes to the ERTC:
• First, the ineligibility to PPP Loan borrowers was retroactively eliminated. That means PPP Loan borrowers can now go back and amend their payroll tax filings for 2020 to claim refunds to the extent they qualified for the ERTC during 2020. So far this year, we have helped clients file nearly $1.5 million in refund claims for 2020.
• Second, Congress extended the ERTC through Dec. 31, 2021, and significantly increased the benefit to as much as $28,000 per employee.
How do I qualify for the ERTC?
For 2020, employers were eligible to claim the ERTC if either of these two things happened:
1. Your operations were fully or partially suspended due to a COVID-19-related governmental order, or
2. You experienced a more than 50% reduction in gross receipts for one or more calendar quarters of 2020, as compared to 2019.
For 2021, employers are eligible to claim the ERTC if any one of these three things happened:
1. Your operations were fully or partially suspended due to a COVID-19-related governmental order; or
2. You experience a more than 20% reduction for one or more calendar quarters of 2021, as compared to 2019; or
3. Fourth quarter 2020 gross receipts fell by more than 20% compared to the fourth quarter of 2019. This test qualifies an employer to claim the ERTC for the first quarter of 2021.
How does a PPP loan affect the ERTC?
This is where things get complicated. Both the PPP loan and ERTC are payroll-based relief programs. In a nutshell, payroll plays a big part in achieving forgiveness of the PPP loan, while the ERTC is based on a percentage of wages paid to employees.
In rolling out these programs, Congress said the same wages could not be used in forgiving the PPP loan and in computing the ERTC. So how best to manage this interplay?
A strategic approach to managing wages in 2021
If your business received (or will receive) a PPP loan this year under either (or both) of the First Draw and Second Draw programs, wages paid to your employees can help get 100% of the PPP loan forgiven.
In computing the ERTC, eligible wages are limited to $10,000 per employee per quarter, and the credit rate is 70%. So, the maximum credit per employee per quarter is $7,000.
Because 100% is always better than 70%, consider the following steps to maximize your benefits from both programs:
• Go the Distance — The covered period for your PPP loan can be anywhere between eight and 24 weeks. The expenses incurred during your chosen covered period will determine the forgiveness of your loan. If you are eligible for the ERTC, do not be in a hurry to apply for forgiveness. Generally, the longer your covered period, the more flexibility in using wages for both programs.
• Check the Rearview Mirror — If you have closed your books through March 31, 2021, you can look to see if there was a revenue decline large enough to make you eligible for the ERTC. If you are, then you are automatically eligible for the second quarter, too. If you are not eligible, then you will want to consider dedicating those first quarter wages solely toward PPP loan forgiveness.
• Show Me the Money — If you did not receive a PPP loan this year (and you do not intend to), there is nothing holding you back from claiming the ERTC if you are eligible. If you were eligible for the ERTC during the first quarter of 2021 and you already filed your quarterly Form 941, be sure to file a Form 941-X to submit your refund claim. This could produce a sizable refund or an over-payment you can apply to the second quarter and reduce your upcoming payroll tax deposits.
• Manage Your Wages Like an Asset — By now you know the wages you pay to your employees can help your PPP loan get forgiven as well as generate generous payroll tax refunds. Just not the same wages at just the same time. Assuming you incur enough non-payroll costs, such as rent, utilities and mortgage interest during your PPP loan covered period, you only need to apply just enough wages to equal 60% of your PPP loan to have the loan fully forgiven tax-free. Being smart about applying your wages against your PPP Loan can reserve more wages eligible for the ERTC and produce greater tax refunds.
• There’s No Tomorrow — Oh yes, there is when it comes to the ERTC! Just like all the refund claims we are filing right now for the 2020 ERTC, you will have a chance to use hindsight later this year and claim the ERTC by filing amended payroll tax returns. For many PPP Loan borrowers, the maximum 24-week covered period will likely run out in August. That would be a great time to look back and evaluate the wages needed for forgiveness as well as the wages available to maximize those ERTC refund claims.
With a little foresight, a lot of hindsight and some strategic planning, you really can have it all!
Paul Mueller is a certified public accountant with Northern Colorado operations in Loveland and Estes Park.