- Originally barred from using the PPP program and the Employee Retention Credit (ERC) together, subsequent legislation removed that stipulation.
- Companies must exercise caution to not include wages paid for by the PPP loan within the ERC calculation.
- There is still time in 2023 to retroactively claim the ERC, even if you received forgiveness for a PPP loan.
About 76% of small businesses were able to obtain a loan from the U.S. government’s Paycheck Protection Plan (PPP), according to the Federal Reserve Bank of Cleveland. Many of these businesses avoided bankruptcy early on in the pandemic, a common situation during any economic downturn. In fact, small businesses affected by COVID-19 have filed for bankruptcy at a rate 25% less than small businesses during the Great Recession. Based on preliminary data, the Federal Reserve Bank credits the PPP program with staving off deep financial disaster for the country.
However, small businesses are not out of the woods yet. As the effects of the pandemic continue on the economy, savvy business owners should use every available financial tool to recover from 2020 and 2021. As we move into 2023, the Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), is still a valuable tool accessible for recovering small businesses.
What Makes the ERTC Different from the PPP Loan?
The purpose of the PPP loans was to support American small businesses struggling with the COVID-19 pandemic. More money was allocated to this program than any other relief program in the CARES Act. Almost $800B was distributed to help companies continue to pay their employees during widespread government shutdowns and supply chain disruptions, and to aid in hiring back employees who were laid off. Both self-employed people and business owners could use PPP loans to pay themselves or any other related individuals on the payroll.
The ERTC program was created at the same time to help employers keep their employees on the payroll. It is a tax credit that offsets the FICA tax that employers pay for their employees, roughly 6.2%. This tax credit is for companies with W-2 paid employees who experienced hardships because of the pandemic.
Passed in December 2020, the Relief Act made it possible for businesses to retroactively claim ERTC funds, even if a business had previously received a PPP loan. The Act increased the potential pool of claimants. However, since the tax credit only applies to the employer’s portion of the FICA tax, self-employed persons or businesses without any payroll tax liability are unable to claim it. Owners of businesses and certain related family members also cannot have their wages included as a qualified wage expense.
Common Mistakes Made by Companies Who Take the ERTC and PPP
One of the most common misconceptions from companies is they believe they do not qualify for the ERTC if they took a round of PPP funding. In fact, it is entirely possible for companies to take advantage of both kinds of COVID relief funds, but there can be some interaction between the two programs. Companies should be careful not to double-dip between the PPP and ERTC, particularly for wages.
The PPP loan was intended to cover the highest operating cost of any business - payroll. Business owners were required to spend at least 60% of the loan on payroll and the balance of the loan could be spent on utilities, rent, PPE for employees, or health insurance.
In contrast, ERTC funds can be used on anything since the money is returned as a cash refund. However, the pool of expenses that go into the actual credit is limited to qualified wages and pre-tax health care costs. IRS guidelines state that an employer cannot include wages in the ERTC calculation that were paid for through the PPP funds.
To claim the tax credit, a taxpayer will need to file a Form 941X to amend their quarterly payroll tax filings so that they can receive their refund. Strike requests the PPP forgiveness documents so that we can make this adjustment within our calculation models to ensure compliance with IRS guidelines and to prevent double dipping. Even though the ERTC program ended in Q3 of 2021, businesses can still claim it until 2024, or three years after the date of filing their applicable return.
The quantity and type of employees are also factors when companies want to combine ERTC and PPP funds. A company needs to have less than 100 employees in 2019 to qualify for 2020 PPP benefits, and less than 500 employees in 2019 to qualify for 2021 PPP benefits. Companies who qualified for a Shuttered Venue Operators Grant (SVOG) or a Restaurant Revitalization Fund (RRF) cannot count the amount of payroll they paid with these grants in their ERTC calculations. And the business owner cannot use their own wages or health care costs, or the wages and health care costs of their relatives in the calculations for their company.
Do I Qualify for the ERC Tax Credit?
Companies that were unduly disrupted by government shutdowns or orders, or that could not transition to telework, may qualify for the ERTC. The IRS’s qualifications state that companies need to prove one of two situations.
- Proof of revenue impact: for each quarter in 2020 to qualify, companies need to show the 2020 quarter was down at least 50% versus the same quarter in 2019. For 2021, the quarter must be down at least 20% versus the same quarter in 2019.
- The company’s operations were fully or partially suspended because of government orders related to COVID-19 during 2020-2021.
Service industries, like daycare centers and restaurants, were particularly affected by government shutdowns, but there may be additional qualifying circumstances companies haven’t considered. Here are some other situations that may have led to reduced income or full or partial suspensions that had a more than nominal impact on the business:
- Restaurants that were required to reduce their seating capacity.
- Sports complexes that closed down for the season.
- Corporate retreats that couldn’t host any gatherings.
- Ticketing platforms for major venues like movie theaters or concerts that had all of their events canceled.
- Medical clinics that had to suspend operations or reduce clinic hours.
I Think I Qualify for Additional Business Relief Funds: Now What?
One of Strike’s clients is a national youth hockey organization that received both rounds of PPP loans. For 2020 and 2021, the client faced tremendous disruption to its operations as it had to comply with partial or full government shutdowns. In addition to its PPP loans, Strike determined that the Company qualified for $1.6M in ERC funds.
One of the biggest questions business owners have for us is, “How quickly can I receive ERC funds?” The IRS was tasked with administering COVID relief funds, in addition to its regular tax work. Consequently, the IRS is behind on processing claims. Strike estimates that companies can receive ERC funds within 4-12 months.
Strike aligns itself with the taxpayer. We want to get you the money you deserve within the full extent of the IRS code. If you think you qualify for the Employee Retention Tax Credit in 2023, give one of our tax experts a call. Put your business on the road to recovery today.