The Consolidated Appropriations Act, 2021 (CCA), which was passed by Congress and signed by the president late last December, included a very tax-beneficial provision that liberalized the interaction between PPP loans and the Employee Retention Credit (ERC). Prior to its passage, if an employer obtained a Paycheck Protection Program (PPP) loan, the employer was ineligible to claim the ERC.
However, under the legislation, an employer that is eligible for the ERC can claim the ERC even if the employer has received a PPP loan, under the following circumstances.
- An eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness.
- Any wages that could count toward eligibility for the ERC or for PPP loan forgiveness can be applied to either of these two programs but not both.
This gives rise to some beneficial tax opportunities.
- PPP Loan Forgiveness Denied – If an employer received a PPP loan and included wages paid in the second and/or third quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming the ERC for those wages) and if the request for forgiveness was denied, then the employer can claim the ERC related to those qualified wages retroactively by amending their Forms 941 for 2020. This is done by using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
- Business Qualified but Never Claimed the ERC – If a taxpayer did not obtain a PPP loan, qualified for the ERC in 2020, and did not previously take the payroll credit, they can still do so by filing Form 941-X. Form 7200, which is used to request advance payment of the credit, cannot be used in this situation because it must be filed before the original 941 forms are.
The ERC is a government-sponsored program to keep workers employed and is funded by providing qualifying employers with a refundable credit against certain employment taxes. For 2020, the credit is a refundable payroll tax credit equal to 50% of qualified wages, up to maximum wages of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid to any employee for 2020.
Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to Eligible Employer for the qualified wages paid to Employee A is $5,000.
Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters of 2020.
No credit is available for any period for which an employer is allowed a Work Opportunity Credit with respect to an employee.