Initial Thoughts on new IRS Guidance on PPP and ERC
We have been waiting several weeks for guidance from the IRS on the interplay of PPP loan forgiveness and the Employee Retention Credit (ERC). For 2020, the ERC is available if you had at least one quarter where revenues were less than 50% compared to the same calendar year quarter in 2019 (we are assuming the farmer is an essential business and not required to shutdown or partially shutdown).
However, you could not use wages for both PPP loan forgiveness and the ERC. Today the IRS released notice 2021-20 which outlines how this interplay works (in 102 pages).
In brief, the wages disallowed are based on how you reported wages on the PPP loan application. If you only reported wages to get forgiveness, you are stuck with not allowing the wages (up to the loan amount) for ERC. If you reported other qualifying costs plus the wages, then more wages will be allowed for ERC.
Three examples will show you how this will likely work in most situations. In each example your PPP loan amount is $200,000. Payroll costs are only wages and health insurance costs since those qualify for both the PPP and ERC. Other qualifying costs may be different amounts.
Example # 1 – You report $200,000 of qualifying payroll costs and no other qualifying costs (even though you had $70,000 of other costs). $200,000 of payroll costs are not allowed for the ERC. You could have reported the $70,000 of other costs but chose not to bother with listing them on the forgiveness application. This prevents $70,000 of payroll costs qualifying for the ERC.
Example #2 – Same facts as Example #1, but you report the full $200,000 of payroll costs plus the $70,000 of other costs. Instead of $200,000 of payroll costs not being allowed for ERC, it drops to $130,000, the minimum amount of payroll costs needed to get full forgiveness in combination with other costs.
Example # 3 – Same as Example #2, however other costs are now $90,000 which was reported on the application. In this case, the minimum payroll needed to get full forgiveness is $120,000 (60% of $200,000), therefore $80,000 of payroll costs will be allowed for the ERC.
As we have mentioned several times in previous posts there was never a good reason to get in a hurry to file for PPP loan forgiveness. We know many clients and bankers wanted to get the forgiveness dealt with before the end of the year, but as you can see in Example #1, that haste may prevent you for claiming the full ERC.
