One of the most popular provisions within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was the Paycheck Protection Program (PPP), especially among small business owners. The PPP allowed eligible businesses to receive up to $10 million in funds, calculated based on 2.5 months of average monthly payroll costs. What made this program so attractive to many was the forgiveness component. Companies would be eligible for forgiveness if they used the funds to cover eligible payroll and certain non-payroll costs.
Following the passing of the CARES Act, many interim rulings provided additional guidance. The rules were ever-changing. In late December of 2020, the Consolidated Appropriations Act (Appropriations Act) extended the time to make PPP loans and introduced the Paycheck Protection Program second draw, which permits small businesses who received and used funds from the first round of PPP to receive up to an additional $2 million if they had no more than 300 employees and experienced a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
A less popular provision of the CARES Act was the Employee Retention Tax Credit (ERTC), which was only available to employers who did not receive a PPP loan. In many cases, the benefits from the PPP exceeded the ERTC amounts, so employers chose to receive the PPP. The Consolidated Appropriations Act amended the provisions of the ERTC to allow PPP recipients to be considered eligible employers for ERTC, should they meet all other eligibility criteria. This was made retroactive for 2020, thereby allowing eligible employers to apply for the ERTC on qualified wages for that year. Most recently, the American Rescue Plan Act issued an extension on the ERTC through the end of 2021.
An eligible employer for the ERTC is one that carries on a trade or business and was fully or partially shut down due to government orders for any calendar quarter in 2020 or 2021 OR had a year-over-year decline in quarterly gross receipts of 50% for 2020 and more than a 20% decline in 2021 quarterly gross receipts compared to the same quarter in 2019 or the immediately preceding quarter. Eligibility is determined and should be reviewed quarterly. Eligible employers may receive a credit for 50% on qualified wages up to $10,000 per employee for March 2020 through December 2020, and 70% on qualified wages up to $10,000 per employee per quarter through the end of 2021.
There are a few notable things to consider in determining ERTC eligibility, including the rules and qualifications for government-mandated shutdowns. Employers should consider whether:
- all or parts of their business operations were shut down or limited due to federal or state mandates;
- there was a nominal impact to the business if only parts of a business operation were suspended;
- multiple jurisdictions were applicable;
- capacity or hours were limited; and
- critical suppliers’ operations were suspended.
The ERTC can be substantial for eligible employers and can help with cash flow planning if proactively analyzed and planned for in conjunction with the PPP. Recipients also may be eligible for the ERTC on wages not covered by the PPP. The ERTC cannot be claimed on the same wages or payroll costs for which forgiveness will be granted, and other employer tax credits also need to be considered, such as R&D, Families First Coronavirus Response Act (FFCRA), and the Work Opportunity Tax Credit (WOTC).
If companies received PPP funds and are also eligible for the ERTC, an analysis can be completed to determine how to best elect payroll costs during the PPP covered period and the quarters for which the employer is eligible. If companies qualify for the PPP and ERTC, they should be careful to not elect more payroll costs than necessary when completing PPP forgiveness applications.
PPP borrowings are based on 2.5 months of average monthly payroll costs. Borrowers have up to 24 weeks to use the funds over the covered period for payroll and non-payroll costs, and 60% of the loan proceed amount must be used for covered payroll costs to achieve full PPP forgiveness.
To maximize benefits from the PPP and ERTC, covered non-payroll costs should be used in calculating PPP forgiveness. By electing more payroll costs than necessary on PPP forgiveness applications, eligible employers may miss out on opportunities to receive ERTC amounts.
If PPP recipients have not yet applied for forgiveness on their 2020 loans, they should be evaluating whether they are eligible for the ERTC for 2020. PPP recipients have 10 months from the last day of the covered period to apply for PPP forgiveness. This gives companies the time to review and analyze forgiveness calculations and applications before applying for forgiveness. Since 2020 payroll tax filings have already been submitted, there is also time to review and retroactively claim the 2020 ERTC.
Eligibility should be carefully evaluated for both the PPP and ERTC. First, the qualifications for eligibility are different between the two and, therefore, there may be companies that are eligible for PPP second draw and not ERTC 2021 and vice versa.
Additionally, there may be differences when looking to elect costs for the PPP or ERTC. Payroll costs are not defined the same for the PPP as they are for the ERTC. Full-time equivalents also are not defined the same, and the rules are different for affiliation and aggregation. For the ERTC, it is important to note that members of a controlled group are treated as a single employer and must be aggregated when considering if employers meet the government shutdown rules when looking to revenue reductions and headcount.
To obtain ERTC funds for 2020, eligible employers should work with their tax professionals to file amended Form 941s for the applicable quarters in 2020. For 2021, eligible employers can calculate the estimated ERTC for the period and reduce their payroll tax deposits by the amount they can reasonably estimate.
Employers can also request an advance using Form 7200. Amounts are reconciled with quarterly 941 filings, and any refund amounts can be claimed or rolled forward. It is critical that employers maintain good records to support calculations, eligibility criteria, and reconciliation for claims.
It is critical for PPP recipients and ERTC eligible employers to document everything! Documentation should include eligibility support, support for certifications made, documentation for covered payroll and non-payroll costs for PPP forgiveness, and analysis of payroll costs applied for PPP forgiveness and the ERTC.
Eligible small businesses and employers should work with their advisers to review the benefits available to their business and how best to optimize them. Don’t miss out on the opportunity to stack the PPP and ERTC and document, document, document!
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Alisha Jernack is a partner with Mazars. She has more than 10 years’ experience servicing entrepreneurs and small businesses. She specializes in financial reporting, tax and advisory services to family-owned and owner-operated businesses in trucking, warehousing, logistics, and heavy-haul businesses, as well as various manufacturing and distribution industries, and various service industries.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.