What PPP Loan Recipients Must Know to Claim the Employee Retention Tax Credit by Andreea Cioara, CPA
Taxpayers that received Paycheck Protection Program (PPP) loans to maintain and continue paying their workforce through the COVID-19 pandemic may be missing out on valuable employee retention tax credits (ERCs) equal to as much as $7,000 per employee, per quarter in 2021. Here is what eligible businesses and non-profits need to know to claim as much as $28,000 per employee in refundable tax credits in 2021.
When Congress introduced the ERC in 2020 as part of the CARES Act, it specifically excluded PPP loan recipients from qualifying for the fully refundable credit. Rather, taxpayers were required to choose between the ERC or the PPP loan. Subsequent legislation changed that while also increasing the amount of the credit and the covered period through Dec. 31, 2021. With this expansion of the credit, PPP loan recipients that also meet the ETC eligibility requirements may now claim refundable tax credits against the employer share of Social Security tax equal to 70 percent of qualified wages (up to a maximum of $10,000 per employee per calendar quarter) paid to employees between Jan. 1, 2021, and Dec. 31, 2021.
For purposes of claiming the ERC, qualified wages include compensation paid to employees and the employers’ costs for providing and maintaining group health plans during a calendar quarter, but only to the extent that these amounts are excluded from the employees’ gross income. Moreover, PPP loan recipients now qualifying for the ERC may not use eligible wages or other payroll costs paid with forgiven PPP loans to calculate the ERC. Rather, the IRS will consider the taxpayer to have made an election to exclude from the ERC calculation any payroll costs included on a PPP application for loan forgiveness. This requires taxpayers to assess how much of their PPP loans they allocated to wages and whether they still have opportunities to maximize cash flow by taking advantage of both the PPP and the ERC.
PPP loan recipients may receive immediate access to the ETC by reducing the employment tax deposits they are otherwise required to make with their quarterly employment tax returns. If tax deposits are not sufficient to cover the credit, the taxpayers may request an advance payment from the IRS only when it is considered a small employer with an average of 500 or fewer full-time employees in 2019; large employers do not qualify for these advanced payments.
To request an advance payment of the ERC, taxpayers must use Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. Taxpayers that received PPP loans and now want to take advantage of the ERC’s availability may amend their previously filed payroll tax returns by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund.
While calculating the ERC will be a complex undertaking for PPP borrowers, it is a worthy effort to undertake with the guidance of experienced advisors and CPAs to improve cash flow and financial positions today and in the future.
About the Author: Andreea Cioara , CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
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