Employee Retention Credit and PPP Forgiveness | Employee Retention Credit PPP Loan

Employee Retention Credit and PPP Forgiveness | Employee Retention Credit PPP Loan | Employee Retention Credit 2020 and PPP

The interaction of the ERC with PPP loan forgiveness is a critical part of the ERC calculation. While an employer can qualify for both PPP loan forgiveness and ERC, the same wages cannot be used for ERC and PPP loan forgiveness. Likely, the IRS will closely scrutinize the overlap of ERC and PPP wages. The following should be considered when applying this restriction on the use of qualifying wages:

Retain the PPP loan application, PPP loan forgiveness application, and actual PPP loan forgiveness confirmation from the SBA and financial institution;
From the PPP loan forgiveness application, find the “covered period” and the related payroll costs submitted. Other non-payroll costs listed on the loan forgiveness application will support a less than 100% use of wages needed to satisfy full loan forgiveness. Non-payroll costs can account for up to 40% of total expenses submitted for PPP loan forgiveness;
Only wages falling within the covered period may be used for PPP loan forgiveness. Detailed payroll reports are needed to quantify these PPP/ERC wages accurately; and
Since the wages of majority owners and employees related to those owners are not ERC eligible, their wages may still be used to satisfy PPP loan forgiveness. The PPP wages, though, cannot exceed the $100,000 per employee annual limitation to satisfy PPP loan forgiveness.

The IRS has provided very little guidance other than to say the same qualifying wages CANNOT be used for both the PPP forgiveness and for ERC. This provides opportunities for beneficial allocations of PPP forgiveness to reduce the qualifying wage in the most beneficial way possible to our client while retaining as much of the qualifying wages for the ERC credit. Legacy Tax & Resolution Services uses a proprietary algorithm to determine the best outcome for our client. Our marketing materials indicate that we typically find anywhere from 15 to 25% more of a refund than other firms. This is just one of the reasons why.

The IRS released guidance (Rev. Proc. 2021-48 and Rev. Proc. 2021-49) on the timing of gross receipts and tax-exempt income from the forgiveness or partial forgiveness of Paycheck Protection Program (PPP) loans.

PPP loans were created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides for forgiveness if loan proceeds are used on eligible expenses. Although forgiven loans are not included in gross income, such amounts are included in gross receipts under some federal tax provisions. For example, the inclusion of forgiven PPP loans in gross receipts tests affects small business taxpayers eligible to use the cash method under Section 448(c) and filing requirement thresholds for tax-exempt organizations under Section 6033. Taxpayers who received PPP loan forgiveness can also exclude those amounts from gross income and do not need to reduce deductions for any expense paid out of loan income.

Rev. Proc. 2021-48 provides taxpayers clarity regarding when the loan proceeds become tax-exempt income and are includible for gross receipts tests. The lack of guidance regarding the timing left taxpayers uncertain of when to include forgiven amounts in gross receipts or when the principal loan converts to tax-exempt income for basis and other purposes. Rev. Proc. 2021-49 guides partnership and consolidated groups regarding amounts excluded from gross income and specifically addresses allocations to basis.

Rev. Proc. 2021-48 provides that taxpayers who receive partial or complete forgiveness of a PPP loan may treat the resulting tax-exempt income as received or accrued: (1) as eligible expenses are paid or incurred; (2) when the taxpayer files an application for forgiveness of the PPP loan; or (3) when the PPP loan forgiveness is granted.

Rev. Proc. 2012-48 also addresses initial concerns that a lack of guidance would potentially pose a mismatch of income and expenses—as some entities may not have deducted expenses before a statutory change in the Tax Relief Act of 2020 reversed IRS guidance requiring taxpayers to reduce deductions for expenses paid with forgiven loan proceeds. A safe harbor is available for those who did not deduct otherwise deductible PPP-eligible expenses on a tax return filed before the enactment of the Tax Relief Act of 2020. Taxpayers will be treated as paying or incurring the eligible expenses in the taxpayer’s immediate subsequent taxable year.

Rev. Proc. 2021-48 instructs taxpayers to report tax-exempt income on a timely filed original or amended federal income tax return, information return, or administrative adjustment request (AAR) under Section 6227. Additionally, eligible partnerships can file an amended Form 1065 and provide a corresponding amended Schedule K-1 instead of filing an AAR. Further details are provided in Rev. Proc. 2021-50.

Rev. Proc. 2021-49 guides partnership and consolidated groups regarding amounts excluded from gross income and specifically addresses allocations to basis. Notably, Rev. Proc. 2021-49 does not provide a specific method for a partnership to allocate deductions funded by a PPP loan to its partners. Instead, such deductions must be allocated according to the partners’ overall interests in the partnership. Allocations of the tax-exempt income resulting from the forgiveness of a partnership’s PPP loan are made similarly.

Rev. Proc. 2021-48 is in effect for any taxable year in which a taxpayer paid or incurred eligible expenses described in the revenue procedure and any taxable year in which the taxpayer applied for loan forgiveness or forgiveness was granted.