PPP Loan Forgiveness and ERC Enhancements: Considerations to Make For You and Your Business

Now that the calendar has turned over to July, businesses that took Paycheck Protection Program (PPP) loans in the spring of 2020 and have not yet applied for loan forgiveness with their lenders need to prioritize submitting forgiveness applications.  PPP loan repayments are deferred for ten months from the end of the borrower’s covered period.  Deferrals for borrowers that received their PPP loans in early April 2020 will expire later in July 2021.  Here are some items borrowers need to consider as they prepare their PPP loan forgiveness applications:

PPP interplay with tax credits

Borrowers only get one shot at PPP loan forgiveness – once forgiveness is granted by the SBA borrowers will not have the opportunity to amend their loan forgiveness application to revise payroll and non-payroll expenses used towards forgiveness.  Borrowers may need to utilize allowable non-payroll costs for PPP loan forgiveness and reserve payroll costs for the Work Opportunity Tax Credit (WOTC), Research Activities Credit (R&D), Family First Coronavirus Response Act Paid Leave (FFCRA Paid Leave), and/or the Employee Retention Credit (ERC).  Taxpayers may not use the same wages for tax credits and PPP forgiveness – “double-dipping” is not permitted.  WOTC and R&D credits existed prior to the pandemic and the process for identifying wages to use for those credits has not changed.  FFCRA Paid Leave and ERC were created in 2020 and taxpayers may qualify for these credits for which they have not yet claimed.

  • FFCRA Paid Leave is available for businesses that paid employees for time off while they were unable to work because the employee was quarantined (pursuant to Federal, State, or local government order or advice of a health care provider), and/or experiencing COVID-19 symptoms and seeking a medical diagnosis; needing to care for an individual subject to quarantine; or needing to care for a child whose school or child care is closed or unavailable for reasons related to COVID-19.
  • ERC is available for businesses that either experienced a significant decline in gross receipts or were impacted by a full or partial suspension of operations due to a governmental mandate issued as a result of COVID-19. For 2020 the ERC is a 50% credit of up to $10,000 in qualified wages and health plan costs per employee.

While the WOTC and R&D credits are claimed on a taxpayer’s annual income tax return, FFCRA Paid Leave and ERC credits are claimed on an employer’s Form 941 payroll tax return.  Businesses have up to three years from the original filing date of Form 941 to file amendments on Form 941-X.  Businesses that have already filed their 2020 income tax returns will need to file amended income tax returns to reduce deductions for 2020 wages used towards the ERC.   Due to its backlog of unprocessed mail, the IRS has been extremely slow to process Form 941-X filings.  Taxpayers that apply for FFCRA and ERC credits through Form 941-X should anticipate processing to take six months or longer.

Requirements for PPP loans greater than $2 million

The SBA has required that lenders obtain loan necessity questionnaire Form 3509 (for-profit) or 3510 (non-profit) from borrowers with PPP loans in excess of $2 million to assist with evaluation of program eligibility (Borrowers with loans under $2 million are granted safe harbor regarding their certification of need).   Due to concerns over the types of information and time frames requested, the use of Forms 3509 and 3510 has been contested by industry associations and prompted lawsuits against the SBA.  Although the SBA has yet to formally comment, reports began circulating in late June that the SBA will be rescinding the use of Forms 3509 and 3510.  Borrowers with PPP loans in excess of $2 million should not interpret this news to indicate that their PPP eligibility will not be examined, rather the SBA will not use Forms 3509 and 3510 to evaluate the borrower’s certification of need.

PPP second draw loans

Businesses that received PPP second draw loans will go through a similar process in allocating wages between PPP loan forgiveness and tax credits to optimize benefit, only the process will be more complicated compared to PPP first draw loan forgiveness.  The threshold for ERC eligibility due to a significant decline in gross receipts is reduced for 2021, and the ERC wage threshold is significantly enhanced, as will be discussed below.  In addition to the complexity of optimizing wage allocations, businesses will also need to consider the timing of when they apply for PPP second draw loan forgiveness and the impact it may have on their ERC eligibility if qualifying due to a significant decline in gross receipts.

2021 Employee Retention Credit

The Taxpayer Certainty and Disaster Relief Act and the American Rescue Plan Act contained significant enhancements to the 2021 Employee Retention Credit.  The threshold for eligibility due to a decline in gross receipts was reduced from 50% for the 2020 credit to 20% for the 2021 credit.  Additionally, the qualified wage and health plan ceiling was raised from a $10,000 annual limit in 2020 to a $10,000 quarterly limit in 2021, and the credit is increased from 50% of qualified expenses in 2021 to 70% in 2021.  The potential value of this credit has gone from a maximum of $5,000 per employee for all of 2020 to a maximum of $7,000 per employee per quarter in 2021.  Additionally, a new category of eligibility was created for the ERC in 2021 quarters 3 and 4 for businesses that started after February 15, 2020, and average less than $1 million in average gross receipts.  Taxpayers eligible as Recovery Startup Businesses do not have to meet government shut down or gross receipt eligibility requirements, although the credit for these taxpayers is limited to $50,000 per quarter.

If you need guidance on the next steps for applying for PPP loan forgiveness or the Employee Retention Credit, we encourage you to reach out to your trusted advisor or contact us at BerganKDV and one of our expert team members can assist you with your tax planning needs.

CATEGORIES: COVID-19 | Tax & Audit
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