IRS Releases New Guidance Surrounding Interaction between Paycheck Protection Program and Employee Retention Credit

Released in December 2020, the Consolidated Appropriations Act, 2021 (“CAA”) contained nearly 5,600 pages of COVID-19 related relief and guidance.  One welcome inclusion in the CAA was the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Relief Act”), which removed the mutual exclusivity between the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).  While PPP borrowers are now provided with an opportunity to retroactively claim ERC benefits, a number of questions have arisen surrounding the quantification and coordination of the benefits.

In response to the myriad of questions, the IRS issued Notice 2021-20 on March 1, 2021, providing long-awaited direction.  Although Notice 2021-20 contains 100+ pages of information on the ERC, some of which cements previously issued guidance, there are some interesting clarifications and examples provided to support the interaction between the PPP and the ERC.

To take a step back, Section 2301(g)(1) of the CARES Act, as amended by the Relief Act, allows eligible employers to exclude certain qualified wages from the ERC base.  By doing so, eligible employers were permitted to include these wages in PPP loan forgiveness.  However, Notice 2021-20 added one key clarification:

  • The amount of qualified wages included in the payroll costs reported on the PPP loan forgiveness application is up to, but does not exceed, the minimum amount of Payroll Costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven.

In other words, the gross wages included on Line 1 of the PPP Loan Forgiveness Application does not necessarily preclude eligible employers from claiming these wages for the ERC benefit if the total payroll costs reported on the Forgiveness Application exceeds the minimum amount needed to support full PPP forgiveness.  In order to qualify for full PPP Forgiveness, taxpayers still need to spend at least 60% of the PPP funds on payroll costs. For example, consider the following scenario:

  • Borrower A receives $1,000 PPP loan
  • Borrower A spends $1,500 on Payroll Costs during the Covered Period, all of which are qualified wages for ERC purposes
  • Borrower A spends $500 on Non-Payroll Costs during the Covered Period
  • Borrower A includes $1,500 of Payroll Costs and $500 of Non-Payroll Costs on its Loan Forgiveness Application Form

Under this scenario, Borrower A multiplies the $1,000 loan x 60% = $600.  The $900 difference ($1,500 – $600 = $900) is ERC eligible.  Had Borrower A only spent $800 on Payroll Costs, then $200 would be ERC eligible ($800 – $600 = $200). There are a number of other examples provided in the Notice 2021-20 that PPP borrowers claiming the ERC should review to ensure that they are operating within the rules and regulations.

The recent issuance of IRS Notice 2021-20 provides welcome clarity to eligible employers navigating the PPP/ERC maze.  While dual benefits may not be claimed on the same wages, we now have insight into how these two benefits interact.

For more information on these updates, we invite you to register for Sax’s “Recovery Update” on Thursday, March 4 @ 10am for an overview of COVID-19 relief programs and loan forgiveness. 

Register here.

Sax will continue to update you as further details are made available.  Reach out to your Sax advisor or email [email protected] with questions.  For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.

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