First, say thanks to the Consolidated Appropriations Act, 2021 (CAA), enacted December 27, 2020. It opened the door (retroactively and going forward) for Paycheck Protection Program (PPP) participants to also claim the employee retention credit (ERC).
Reminder. Tax credits are the best. They usually reduce taxes dollar-for-dollar. (The ERC is not quite as good as the usual tax credit because you increase taxable income by the amount of the credit. But it’s still good—very good.)
The CARES Act, enacted on March 27, 2020, created the PPP money, but it prohibited you from getting both PPP money and tax credits from the ERC; you had to choose one benefit or the other. Now, thanks to the new December law, you can have both tax-free PPP money and tax credits from the ERC.
And perhaps the best news of all comes from the IRS in its recently released, business-friendly guidance on how the rules work when you want to claim both PPP and ERC benefits.
How the Law Changed
The CAA made four important changes retroactive to 2020:
- You may now qualify (yes, retroactively) to claim the ERC for 2020 wages even though you had a 2020 PPP loan.
- You may not claim the ERC on PPP wages used for PPP loan forgiveness.
- You can elect not to claim the ERC, so as to increase your tax-free PPP monies.
- If your lender denies your PPP loan forgiveness, you can claim the ERC for the qualified wages even when you made the election not to claim the ERC for those wages.
Congress made the changes retroactive to March 13, 2020, allowing you to now amend your 2020 payroll tax returns to claim the employee tax credits for which you are eligible.
You likely hadn’t thought of amending payroll tax returns, because it’s not often done. But you have the three-year statute of limitations for amending payroll taxes just as you have it for your income tax returns.
Strategies to Consider
Consider the following strategies to potentially maximize your retroactive ERCs for the tax year 2020. Include all non-payroll expenses on your PPP loan forgiveness application. This reduces the payroll used for the PPP and increases the payroll eligible for the ERC.
Track qualified wages and non-qualified wages per employee, and document what benefits you claim with those wages. Doing this precisely allows you to optimize your tax benefits.
Omit ERC-qualified wages from your PPP loan forgiveness application. By omitting the ERC-qualified wages from your PPP forgiveness application, you clarify the wages for the ERC and the wages used for the PPP.
Claim the ERC on wages outside of your PPP loan covered period. Your maximum qualified wages per employee are $10,000 over the entire 2020 tax year. If you can reach the maximum wages without including wages paid during the PPP loan covered period, you avoid the overlap issue, and thus potentially minimize the number of amended payroll tax returns you need to file.
Takeaways
With the CARES Act, Congress made you choose between tax-free PPP loan forgiveness or the ERC. You couldn’t do both.
The CAA changed that retroactively and allows you to amend your Form 941s for 2020 to claim the credit (if you qualify).
And here’s more good news: the IRS issued guidance on how your PPP loan interacts with the ERC, so you can amend your 2020 payroll tax returns to claim this valuable credit.
If you have already submitted for PPP loan forgiveness, what you put on the application controls the options you have now. But if you have not yet submitted your PPP loan forgiveness application, consider the following strategies to obtain the largest ERC possible:
- Include all non-payroll expenses on your PPP loan forgiveness application.
- Track qualified wages and non-qualified wages per employee, and document what benefits you claim with those wages.
- Omit ERC-qualified wages from your PPP loan forgiveness application.
- Claim the ERC on wages outside of your PPP loan covered period.
When you can get this right, you qualify for both 100 percent PPP loan forgiveness and the ERC.
If you would like to discuss how the new law changes the ERC and intertwines with the PPP, please call me on my direct line at 509-543-7600 or send a request HERE.
May 2021
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