If I Got Approved for a PPP, Can I Also Get the ERC?
- April 10, 2021
- 4 min read
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The short answer is yes: You can get the Employee Retention Credit (ERC) even if you’ve received a Paycheck Protection Program (PPP) loan. That wasn’t always the case, however. When the CARES Act got signed into law in March of 2020, it prohibited PPP loan recipients from applying for the ERC.
But thanks to later stimulus packages that passed in Congress following the original CARES Act, businesses that receive PPP loans are now allowed to get the ERC with respect to any wages not paid for with PPP loan proceeds. The new rules are retroactive to the passage of the CARES Act, which means eligible employers might be entitled to refunds for payroll taxes already deposited in 2020.
If all that sounds confusing, it helps to take a step back and gain a greater understanding of the PPP itself.
The PPP is a federal loan program that initially earmarked $350 billion for small businesses that were hurt by the COVID-19 pandemic. Qualifying businesses were provided with low-interest, federally guaranteed loans to provide eight weeks of cash-flow assistance. Any business that had to have a partial suspension of operations or shut down full business operations due to the Government order could qualify for the Coronavirus aid. The loans were backed by the Small Business Administration (SBA), and some were forgivable, meaning certain recipients did not have to pay them back.
The PPP was later expanded by the Paycheck Protection Program and Health Care Enhancement Act, which added an additional $310 billion in funding. Other changes, under the Paycheck Protection Program Flexibility Act, gave businesses more time to spend the funds and made it easier to get a loan fully forgiven. The American Rescue Plan Act additionally expanded the PPP, allowing nonprofits, online news publishers, restaurants, and shuttered venues to take part in the program while expanding loan forgiveness.
The Coronavirus stimulus package signed into law in December 2020 added another $285 billion in funding to the PPP. That package also offered a second PPP loan to qualifying businesses that used up their first PPP loans and saw significant decline in revenue due to the pandemic.
Although the PPP and ERC are both part of federally funded efforts to help small businesses deal with lost revenue caused by COVID-19, there are some key differences. For example, funding is limited for the PPP. That’s not the case with the ERC – any business that qualifies and applies will get the tax credit.
Before the Consolidated Appropriations Act of 2021 was passed, businesses that received PPP loans couldn’t claim the ERC. Most businesses opted for the PPP because it was easier to access and offered more financial relief. The PPP was calculated by multiplying monthly payroll in 2019 times 2.5, with a cap on maximum salary of $100,000, equaling up to $20,800 per employee. In contrast, the ERC only went up to $5,000 per employee.
The CAA’s Taxpayer Certainty and Disaster Tax Relief Act changed this rule retroactively, so that eligible employers that received a PPP loan in 2020 could now claim the ERC for qualified wages paid after March 12, 2020, and before Jan. 1, 2021. The one caveat is that an employer can’t claim the ERC on wages used to receive PPP loan forgiveness – a process called “double dipping.”
Changes to the PPP-ERC relationship that go into effect in 2021 can get a little complicated, so unless you have expertise in this kind of thing, you should hire a tax consultant or CPA to help out sorting through your maximum credit you can receive and go over your qualified health plan expenses. But it’s still a good idea to learn as much as you can about how PPP loans you might have received in 2020 are now accounted for under the new ERC rules.
According to tax and financial consultant CliftonLarsonAllen (CLA), it’s not uncommon for an employer to have submitted a PPP Loan Forgiveness Application and reported only payroll costs – even though the employer also paid other eligible expenses. Many employers did this because they submitted their PPP applications when they still couldn’t claim the ERC credit. Here’s an example:
Suppose Employer A received a PPP loan of $200,000. This is an eligible employer that paid $200,000 of qualified wages that would qualify for the ERC during 2020. Employer A also paid other eligible expenses of $80,000. It must report a total of $200,000 of payroll costs and other eligible expenses – with a minimum of $120,000 of those costs being payroll costs – to receive full forgiveness of its PPP loan.
Employer A submitted its PPP Loan Forgiveness Application and reported $200,000 of qualified wages as payroll costs, but did not report any of the $80,000 eligible expenses. Employer A then received a decision from the SBA forgiving the PPP loan in its entirety.
So, can Employer A use $80,000 of qualified wages to claim the ERC, since it could have used $80,000 of other eligible expenses on its PPP Loan Forgiveness Application? Not according to IRS guidance, which says no portion of the qualified wages reported as payroll costs can be treated as qualified wages for purposes of the ERC. In short, Employer A can’t reduce its deemed election by the amount of other eligible expenses that it could have reported on its PPP Loan Forgiveness Application.
You might also wonder whether an ERC can be claimed if you paid wages that were part of a PPP forgiveness application. According to the website of tax and financial services provider Plante Moran, the same wages can’t be used to claim the ERC and also support PPP borrowers loan forgiveness. Wages included in payroll costs on a PPP Loan Forgiveness Application – up to the minimum amount of payroll costs needed to support loan forgiveness – don’t qualify for the ERC. However, any excess wages above the maximum amount supporting PPP forgiveness can be included in ERC-qualified wages.
Another gray area is whether gross receipts should include proceeds of PPP loans received during a calendar quarter, or amounts forgiven. There hasn’t been an IRS notice or Governmental order directly addressing this issue. But Plante Moran noted that under general tax principles, loan forgiveness – even if tax-exempt – would ordinarily be included in gross receipts. Depending on certain circumstances, this might disqualify your business from ERC eligibility for specific quarters. In these kinds of circumstances, your best bet is to wait for additional guidance from the Internal Revenue Service before claiming the ERC or check their FAQ page.
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