Can You Apply for both ERC and PPP? All Your Filing Questions Answered

erc and ppp
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The ERC (Employee Retention Credit) and PPP (Paycheck Protection Program) were both created to keep small businesses afloat when the pandemic hit hard. These two programs were designed to encourage employers to keep their employees on payroll, even if they were not working during the covered period.

Certain legislature allows companies to retroactively claim employee retention credits. It also provides guidance on the interactions between the ERC and PPP. Continue reading this ERC loan guide below to learn more about these two programs and how you can retroactively claim credits for your business.

Understanding the Employee Retention Credit (ERC)

What Is an ERC Loan?

The CARES Act, short for Coronavirus Aid, Relief, and Economic Security Act, authorized the Employee Retention Credit. This refundable payroll tax credit encourages employers to keep employees on the payroll. Even if they weren’t working during the covered period due to the pandemic.

If you had to close your business due to the government order, you may be eligible for this credit. You also can claim this credit if you had a significant decline in gross receipts.

Key points about ERC:
  • The credit amount is up to 70% of qualified wages, allowing you to recover a substantial portion of your payroll costs.
  • Eligible employers can claim the credit against their payroll taxes, and any excess can be refunded.
  • It applies to both large corporations and small businesses, making it a valuable resource for various industries.

3 Advantages of ERC

The ERC offers numerous advantages for businesses looking to optimize their growth strategies:
  1. Financial Boost: By claiming the ERC, your business gains access to a considerable tax credit, injecting much-needed capital into your operations.
  2. Employee Retention: Retaining your workforce is essential for maintaining productivity and ensuring a smooth transition into the recovery phase.
  3. Competitive Edge: Companies that take advantage of the ERC can reinvest their savings into innovation, marketing, and expansion, gaining a competitive edge over their peers.

Qualifying for ERC

To qualify for the Employee Retention Credit, you must meet certain criteria:
Revenue Impact: Your business must demonstrate a decline in gross receipts compared to a similar quarter in 2019. This is essential to establish eligibility based on the impact of the pandemic on your operations.
Full or Partial Suspension: Alternatively, you can qualify if your business operations were fully or partially suspended due to government orders during the pandemic.
Employee Count: The ERC is available to businesses of all sizes, but the credit amount varies depending on the number of employees.

How to Apply for ERC

To apply for the ERC, follow these steps:
Gather Required Documents: Collect all necessary documents, including payroll records, financial statements, and tax forms.
Review Eligibility Criteria: Ensure your business meets all the eligibility requirements to claim the credit.
Calculate Credit Amount: Accurately calculate the credit amount you’re eligible to claim based on your qualified wages.
File for the Credit: Include the necessary information on your employment tax return or use Form 941 to claim the credit.
 

Understanding the Paycheck Protection Program (PPP)

What Is the PPP Loan?

The Paycheck Protection Program (PPP), was initially created to provide forgivable loans. Like the ERC loan, the PPP loan intends to keep employees on the payroll. Employers could rehire laid-off workers that lost wages to disruptions caused by COVID.

Key points about PPP:

  • The loan amount is calculated based on your payroll costs, making it easier to secure funds that align with your business needs.
  • PPP loans can be fully or partially forgiven if you use the funds for eligible expenses, such as payroll, rent, utilities, and mortgage interest.

3 Advantages of PPP

The Paycheck Protection Program offers several advantages to businesses seeking growth and stability:
  1. Financial Security: PPP loans provide a safety net during economic downturns, allowing you to focus on long-term goals without constant financial worry.
  2. Retain Talent: By utilizing PPP funds to retain your employees, you can build a loyal and skilled workforce that drives your business forward.
  3. Operational Flexibility: The forgivable nature of PPP loans gives you the flexibility to allocate resources strategically, adapting to changing market conditions.
 

Qualifying for PPP

To qualify for the Paycheck Protection Program, your business must meet specific criteria:
Small Business Status: Generally, businesses with fewer than 500 employees are eligible, but certain industries may have different employee limits.
Impact from COVID-19: You must demonstrate that your business was adversely affected by the pandemic, leading to a need for financial assistance.
Loan Amount Calculation: Understand the formula used to calculate the maximum loan amount your business can receive based on your payroll costs.

How to Apply for PPP

To apply for the Paycheck Protection Program, follow these steps:
Find an Eligible Lender: Use the SBA’s lender search tool to identify a suitable lender participating in the program.
Gather Necessary Information: Prepare your payroll documentation, financial statements, tax records, and other required paperwork.
Complete the Application: Fill out the PPP loan application form with accurate and up-to-date information about your business.
Submit the Application: Submit your completed application to your chosen lender, ensuring all required documents are included.

ERC and PPP

Originally the ERC and the PPP (paycheck protection program) were exclusive, meaning that an ERC borrower could not also claim the ERC. The Consolidated Appropriations Act 2021, retroactively undid the exclusivity. This allows a PPP borrower the ability also to claim the ERC tax credit.

Consolidated Appropriations Act Updates

Changes made to the Consolidated Appropriations Act 2021 apply to the period from Mar 13, 2020, to Dec 31, 2020. If your business received a PPP loan you might still qualify for the Employee Retention Credit. This is only for wages not paid with funds from the forgiven part of your PPP. The CAA update also states group healthcare expenses are qualified wages even if no other wages are paid to your employees.

Employee Retention Credit Updates

The update for the Employee Retention Credit rate per employee changed from 50% to 70%. The per-employee wage limit increased from $10,000 annually to $10,000 quarterly in 2021.

Your eligibility is based on gross receipts of less than 80% compared to the same quarter in the year 2019. This means that if your gross receipts declined over 20% in 2021, you could take the ERC credit.

ERC and PPP Concerns

There are a few concerns circling around filing for this credit before PPP loan forgiveness. In general, most people filed for the forgiveness for the first round of PPP loans before the Consolidated Appropriations Act passed.

For those who did this, their wage amounts reported for the Paycheck Protection Program loan forgiveness were excluded from those ERC eligible wages in 2020. The remaining wages were left over for the Employee Retention Credit.

Most businesses concluded their PPP second-draw covered period towards the end of the 3rd quarter in 2021. However, qualifying companies were able to file amended 941X forms for the Employee Retention Credit for the second quarter.

PPP Loan Forgiveness Concerns

There is an issue in filing for the ERC loan before receiving forgiveness for the PPP. For example, let’s say you received your second draw PPP loan of $800,000 on the first of January and had $480,000 in wages in Q1 and Q2.

This amount is enough to cover the PPP loan when you apply for forgiveness. However, if $240,000 each quarter ($480,000 for quarters one and two) was considered eligible for ERC, and you file for the ERC first, you will only have $320,000 remaining in wages for the PPP forgiveness.

Although you could look into maximizing your non-payroll expenses for the Paycheck Protection Program loan forgiveness, the payroll must take up at least sixty percent of the expenses. So in our above example, the business owner would need to report $480,000 for complete PPP forgiveness, but they do not.

How to Maximize the ERC

The best way to maximize the ERC is to have a proper plan in place to reduce any surprises when you go to file for the Paycheck Protection Program 2 loan forgiveness. For example, you can track eligible non-payroll expenses.

While a business owner can only report approximately forty percent of the loan amount for non-payroll expenses, this can help free up wages you can use for the Employee Retention Credit. Those who filed in mid-2020 for their PPP 1 loan forgiveness can use additional non-payroll expenses such as supplier costs, software expenditures, and worker protection expenses.

Review ERC Qualification

Depending on the method of how you qualify for the Employee Retention Credit, your qualification may end in any quarter in 2021. For example, if your covered period for the PPP second-draw goes into the 3rd quarter, but you don’t expect to qualify for the ERC in Q3, then you can concentrate wages for your ERC in Q1 and Q2. When you do this, it allows you to receive full loan forgiveness.

Create the Right Strategy for You

The ERC and PPP loans were both created to help business owners keep their employees on payroll. It also provided them with the funds needed to keep the business afloat. Getting your ERC wages paid for in 2021 is easy, but you can use a few different strategies depending on what works best for you and your situation. Contact us now if you want to learn more about your ERC loan and your available options.

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