Claiming the Expanded Employee Retention Credit (ERC)? —Wait to Apply for PPP Loan Forgiveness

Claiming the Expanded Employee Retention Credit (ERC)? —Wait to Apply for PPP Loan Forgiveness

February 12, 2021

Businesses wanting to claim the newly expanded Employee Retention Credit should wait to apply for forgiveness of their Paycheck Protection Program loan—at least until the IRS finalizes rules for the tax credit.

If a business received a Paycheck Protection Program (PPP) loan under the CARES Act, passed in March 2020, it was not eligible for the Employee Retention Credit (ERC)—a “refundable tax credit against certain employment tax equal to 50 percent of the qualified wages an eligible employer paid to employees after March 12, 2020, and before January 1, 2021,†according to the IRS.

The question now, almost a year after the CARES Act was passed, is how that limitation will play out in consideration of new legislation. December 2020’s Consolidated Appropriations Act (commonly referred to as the “New Stimulus Actâ€) changed the rules so that a PPP loan no longer absolutely disqualifies employers from receiving an ERC, and also bumps the credit up from up to 50 percent of qualified wages to 70 percent.

In light of these changes, many business leaders have begun to set their sights both on claiming the ERC and obtaining loan forgiveness, but they must keep in mind that, with the new legislation, there are still limitations on claiming the newly expanded ERC. Currently the credit may not be claimed for wages paid by PPP loan proceeds that have been or will be forgiven. What should businesses do?

If possible, businesses should wait to apply for PPP loan forgiveness. Until the IRS and U.S. Treasury Department issue guidance, a business interested in applying for a second loan under the PPP should delay its application for forgiveness of its First Draw, according to the American Institute of CPAs.

Questions on the PPP or ERC? Contact REDW Senior Tax Manager Craig Neumann.

For those businesses that already submitted PPP loan forgiveness applications before the New Stimulus Act was passed—can they claim the Employee Retention Credit? What we know is that, in 2020, if a business paid more in qualified wages than the amount of the forgiven PPP loan, they will be able to claim the credit retroactively and apply it to the difference. However, the official word on ERC is still pending, as the IRS is finalizing rules for the tax credit and expected to release guidance soon afterward. Until said guidance is issued, the most heavily impacted businesses may find the clock ticking a little too loudly…

In the meantime, REDW advisors are here and ready to help you prepare to claim the ERC and apply for the second round of PPP loans for your business. Please contact Senior Tax Manager Craig Neumann for any ERC or PPP-related questions or for further professional advisement on preparing your PPP loan forgiveness application.

REDW is committed to keeping you informed at all times, and especially through the impacts of the COVID-19 pandemic. Stay connected with us on LinkedIn and @REDWLLC on Twitter. Access some of our other updates on our COVID-19 Resource Hub.

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