In December 2020, changes were made to The CARES Act under the COVID-19 relief package, which expanded eligibility for the Employee Retention Tax Credit (ERC). Today businesses who received a Paycheck Protection Program (PPP) loan can also claim the ERC, a refundable payroll tax credit of up to $33,000 per employee.
The ability for employers to take advantage of both the PPP loan and the ERC is aligned with the congressional intent of the programs, which were created to help sustain businesses and retain their employees during the COVID-19 pandemic.
See below for highlights of each program:
|Confidentiality||Public information. Receipt of PPP loan is public information||Confidential. Covered by the Taxpayer Bill of Rights|
|Employer Size||Only available for <300 FTE||No limit|
|Decline in Gross Receipts||Must have experienced a decline of 25% in a quarter, compared to the same quarter in 2019||Not necessary. Can qualify for the ERC without any economic impact under the Government Orders Test|
|Restrictions||Must use at least 60% of loan proceeds on payroll||No restrictions|
|Max||Not to exceed $2M or $2.5 months in average payroll||$33,000 per employee max potential benefit.
($5,000 per employee in 2020; and $7,000 per employee per quarter in 2021)
|Audit Risk||More risk due to repayment provisions||Low risk. Synergi also provides audit support|
|Eligible Employers||Private equity companies and public companies not eligible||No restrictions (other than some governmental employers)|
The above showcases that while there are significant and long-term advantages to be gained by partaking in both, participation is nuanced and greatly depends on each company’s individual circumstances. What it comes down to is that each program has its own set of regulations, qualification criteria and deadlines. And because the rules around the ERC have changed, and the circumstances relating to COVID-19 continue to evolve, many companies are unsure of the path forward and how to maximize both the benefit of both the ERC and PPP loan.
It is important to note, if you are eligible for a PPP loan you are likely also eligible for the ERC.
AM I ELIGIBLE FOR THE ERC?
To be considered an eligible employer for the CARES Act ERC you must satisfy ONE of the following tests:
- Government Orders Test — an employer must have experienced a full or partial suspension of business operations due to directives enacted by an appropriate governmental authority in response to COVID-19. Common disruptions include: the inability to travel, reduced access to equipment, supply chain delays and mandated sanitation practices—all of which can greatly inhibit a company’s ability to conduct its business; OR
- Gross Receipts Test — an employer must have experienced a significant decline in gross receipts. A “significant decline” is defined differently in 2020 and 2021. When analyzing whether an employer is eligible for the CARES Act ERC in 2020 under the Gross Receipts Test, an employer is eligible if it experienced a 50% or greater decline in gross receipts compared to the same quarter in 2019. The threshold was lowered for 2021 eligibility and now, an employer is eligible for the ERC under the Gross Receipts Test for a quarter in 2021 if it can show it experienced a 20% or greater decline in gross receipts compared to the same or alternate quarter (as defined in the legislation).
It is important to note, the intent of Congress is clear in the plain language of legislation which provides that an employer must satisfy the Gross Receipts Test or the Government Orders Test, not both. Thus, a company does not have to experience a decline in revenue to be eligible for the ERC.
ALREADY TOOK A PPP LOAN AND WANT TO CLAIM THE ERC?
If your company has taken round 1 and/or 2 PPP loan, you can claim the ERC— but you need to evaluate two (2) important areas:
- No Double Dipping. You cannot include wages paid for with PPP loan funds as qualified wages in the ERC calculation. Spend time documenting what wages were paid with PPP loan funds and utilize those funds towards allowable expenses – other than wages. Consider partnering with Synergi Partners – we specialize in helping companies participate in tax credit programs so you can maximize both benefits.
- Review your internal team’s knowledge and understanding of the regulations. Despite having in-house accountants and CPAs, many businesses are making assumptions or overlooking important information that is costing them access to invaluable resources. This is because these individuals are generalist and at times lack the knowledge and understanding around the written intent of the legislation, misinterpreting qualification requirements. To avoid costly mistakes is to work with teams like ours who are experts in maximizing federal and state tax programs. We’ll partner with your internal stakeholders to make sure you leave no stone unturned.
By taking the time to evaluate your organization’s existing data and resources, you’ll successfully identify gaps, avoid costly mistakes, maximize credits and ensure your ERC documentation is in order in the event of an audit.
See below for just a few common misconceptions that our team regularly encounters:
Consider partnering with a team of experts who can help you properly assess your current state, determine your eligibility, and ensure that you’re filing in a way that will translate to the biggest benefit for your business.
In working with an expert like Synergi Partners, you’ll also discover how to address gaps mentioned above. We specialize in maximizing federal and state tax credit programs. Our team is always up-to-date on related rules and regulations. With our expertise and guidance, we make it much easier for your business to participate in future tax credit programs.
Today, the choice isn’t whether to apply for a PPP loan or the ERC. Rather, it’s if your business will recognize the opportunity to maximize the advantages of both the programs.