PPP loans and Employee Retention Credits have both had numerous changes since they were originally enacted into law by the CARES Act on March 27, 2020. The purpose of this PayDay article is to highlight recent changes to PPP loans and ERC payroll tax credits AND also discuss action steps as to prioritizing “which comes first” as well as strategy to allocating costs to maximize employers’ benefits from these programs (to include the brand new grant program for restaurants/bars/caterers).
RECENT PPP/ERC HIGHLIGHTS—-MOSTLY GOOD FOR EMPLOYERS!
Applications for both “first draw” and “second draw” PPP loans were set to expire at the end of March, BUT legislation was just enacted to extend PPP loan applications to May 31, 2021. Employers must apply with their bank by May 31 and then the SBA has 30 days in which to process and originate the PPP loan (June 30 deadline for SBA). If you are eligible for a PPP loan (gross receipts decline of at least 25% during one quarter of 2020 compared to the same quarter of 2019), we recommend that you apply as soon as possible since the remaining funds could dry up before the May 31st application deadline. As we have discussed before, it is generally more efficient to apply with the same bank/lender as for a first round PPP loan since your documents for PPP #1 should still be at the bank for your PPP #2 loan—We do know of some employers who are using smaller, community banks and/or the online “Fintech” PPP lenders rather than the larger banks who may have given priority to larger PPP loans during “round 1.”
The Employee Retention Credit was extended through March 31st by the CAA legislation and has recently been further extended until December 31, 2021 by the American Rescue Plan Act. Our previous articles about eligibility for the ERC payroll tax credit can be found here. IRS Notice 2021-20 also provides helpful guidance about the definition of a “partial suspension” of operations, to include examples (NOTE—Notice 2021-20 only provides guidance for 2020 retroactive ERC tax credits, and the IRS has promised future guidance for ERC credits for year 2021.) This notice also clarifies that ERC credits for 2020 must be claimed by filing amended IRS 941 forms “quarter by quarter” for each impacted quarter during 2020. AccuPay has already filed several amended 2020 quarterly IRS 941 forms to claim retroactive 2020 ERC credits. Since ERC credits “overlap/integrate” with PPP payroll loan forgiveness costs (this PayDay will discuss this PPP/ERC integration/overlap, below), we do require that our employer-clients provide us with their calculated ERC wages/healthcare costs for each quarter, generally as calculated by their CPA/consulting firm, who often is also assisting the employer with PPP loan forgiveness reporting (CARDINAL RULE OF OPTIMIZING ERC TAX CREDITS—-DO NOT FILE ERC CLAIMS WITHOUT FIRST CAREFULLY REVIEWING THE IMPACT ON PPP LOAN FORGIVENESS!!)
The American Rescue Act (Biden’s stimulus package), in addition to extending the ERC through December 31, 2021, also appropriated $28.6 billion of non-taxable “grants” to restaurants, bars, caterers, etc whose gross receipts during 2020 were less than calendar year 2019, AFTER subtracting out all PPP loan proceeds received in 2020 and 2021. Example—a restaurant (cannot have more than 20 locations) has 2019 gross receipts of $2,000,000 and has 2020 gross receipts of $1,200,000. This restaurant received a total of $500K in round #1 and #2 PPP loans—-this restaurant may qualify for $300K of a non-taxable grant from the brand new Restaurant Revitalization Fund. These grants must be applied for directly from the SBA and the grant proceeds can be spent on a wide variety of business operating costs (some clarification is needed for some of these costs such as “food and beverages” and “other operating costs.”) THOSE WHO FEEL THEY MAY QUALIFY FOR THESE BRAND NEW GRANTS SHOULD CHECK OUT THE DETAILS AT THE INDEPENDENT RESTAURANT COALITION WEBSITE. Preparation to obtain one of these grants is very important since they are expected to be quite popular. The SBA will likely setup their grant portal for applications during April—–BE PREPARED!!
Recent legislation also extended the FFCRA sick and family leave tax credits from March 31 through September 30, 2021. Employers are not required to pay the COVID FFCRA sick/family leave wages for 2021, BUT those that do will qualify for a 100% tax credit from the IRS for FFCRA wages paid during 2021 (through Sept 30, 2021). ALSO, employees “start over” at “zero” as to FFCRA wages previously used, as of April 1, 2021—-so an employee who had FFCRA wages paid during 2020 can again qualify for FFCRA wages for sick/family leave effective April 1-September 30, 2021—-these FFCRA sick/leave payments cost the employer nothing since they are made whole by a 100% IRS payroll tax credit against their IRS tax deposits.
WHAT IS THE SEQUENCE OF WHAT WE SHOULD DO AS TO PPP, ERC, RRF, LOAN FORGIVENESS, ETC?
The very first action step for an employer is to determine what, if anything, you are eligible for as to COVID financial benefit programs. EMPLOYERS WHO DO NOT QUALIFY FOR ANYTHING AND CAN SKIP THE REST OF THIS ARTICLE ARE AS FOLLOWS:
- You did not have any quarter during calendar year 2020 in which your gross receipts for that quarter did not decline by more than 25% from the same quarter in 2019. An employer who did not have at least one 2020 calendar quarter whose gross receipts declined by more than 25% from 2019 does not qualify for a PPP loan (NOTE—-exceptions to this exist for newly eligible employers, such as 501(c)(6) orgs who could not take a first draw PPP loan)
- You did not have your normal operations “partially or fully suspended”/impacted by official government orders (See Notice 2021-20 for examples)—-AND/OR
- Additionally, you did not have a calendar quarter during 2020 in which your gross receipts declined by greater than 50% as compared to the same quarter during 2019 (for the 2020 employee retention credit)——-For the 2021 employee retention credit, you do not have any calendar quarter during 2021 in which your gross receipts declined by more than 20% from the same quarer during 2019 (also make sure you read about the “immediately prior quarter” election for this comparison.) THESE ARE THE GENERAL RULES TO BE ELIGIBLE FOR EMPLOYEE RETENTION CREDITS FOR 2020 AND/OR 2021
- If you are a restaurant, bar, caterer, tasting venue, inn, etc, and your 2020 gross receipts PLUS your PPP loan amounts are more than your 2019 gross receipts (Eligibility for the Restaurant Revitalization Fund grants require that your 2019 gross receipts be greater than your 2020 gross receipts plus the sum of all your PPP loans received.)
BASED ON THE ABOVE, DO YOU QUALIFY FOR 2021 PPP LOANS OR 2020/2021 ERC TAX CREDITS OR THE NEW RESTAURANT REVITALIZATION FUND PROGRAM?
IF I QUALIFY FOR ONE OF THE COVID STIMULUS LOAN, TAX CREDIT OR GRANT PROGRAMS, WHICH DO I DO FIRST, AND CAN I DO MORE THAN ONE OF THEM?
Many employers will qualify for BOTH PPP loans and ERC tax credits. Those employers in the restaurant/bar/catering/related food/beverage industry could easily qualify for all of the programs—-PPP rounds 1 and 2, restaurant grants and ERC/employee retention tax credits. A GENERAL RULE OF THESE PROGRAMS IS THAT YOU CANNOT USE THE SAME WAGES FOR MORE THAN ONE PROGRAM—-NO DOUBLE-DIPPING BETWEEN ANY OF THE 3 PROGRAMS—-Employers who qualify for more than one of the programs should generally use this “sequencing” of programs from most valuable to least valuable:
- Apply for the PPP loan-–it is not taxable and you need not repay it if you spend all the money on “eligible costs,” with at least 60% being spent on “payroll costs”—PPP loans provide “dollar for dollar” benefits, one dollar for every dollar spent on eligible costs—and tax-free.
- If you fit the definition to qualify for a grant from the Restaurant Revitalization Fund, start preparing to apply for this SBA grant-—like the PPP loan, it is “dollar for dollar” of spending, it is not taxable, and it actually provides a broader list of “eligible expenses” than PPP loans do—Get Prepared!
- Claim wages/healthcare costs for the ERC payroll tax credit IF you have wages/healthcare costs NOT USED for PPP loan forgiveness OR the Restaurant grant program. ERC tax credits are 50 cents on the dollar in 2020 and 70 cents on the dollar in 2021 AND are “taxable” since you can not deduct the wages used for the ERC—Though ERC credits are “last” in their value on this list, they still can provide enormous refund claims/savings in 2020 and even more so in 2021.
- The last action step to take is to apply for PPP loan forgiveness for your first and second draw PPP loans. IRS NOTICE 2021-20 STIPULATED THAT ANY PAYROLL COSTS YOU REPORT IN YOUR SBA 3508 FORM FOR LOAN FORGIVENESS WILL NOT BE ELIGIBLE FOR THE ERC TAX CREDIT——ASK YOUR CPA ABOUT THIS PROVISION OF PLANNING TO OPTIMIZE ALL OF THESE VARIOUS PROGRAMS!!
SINCE NO DOUBLE-DIPPING OF PAYROLL COSTS, HOW DO I MAXIMIZE WHAT I GET FROM ALL THESE PROGRAMS?
Planning to obtain maximum financial benefits from all these programs is the $1million dollar question (in some cases, worth more than a million dollars!!). Planning to maximize your benefits requires knowledge as to which costs qualify for which programs and for which “time periods”—-Wages paid on March 13, 2020 will not qualify for PPP loan forgiveness since PPP loans were not received until April of 2020—BUT they could qualify for ERC since paid after March 12, 2020. HOWEVER, as I write this, IF the employer is a restaurant or in a business which qualifies for RRF grants, that covered period is costs paid from February 15, 2020-December 31, 2021—-SO it could be advantageous for this employer to use those March 13, 2020 wages as part of the spending towards their RRF grant if they receive the grant (like the PPP loan, the grant program requires that the grant proceeds be spent on “eligible costs” during the period Feb 15, 2020-December 31, 2021). HOWEVER AGAIN, If the restaurant can use other non-wage eligible costs to forgive the RRF grant, it would be inclined to use those wages paid on March 13th for the ERC tax credit.
Is the above confusing enough? This is why AccuPay recommends that employers engage their CPA/consulting firms to put together spreadsheets of payroll and non-payroll costs, divided into various time periods of the various programs, in order to maximize the employer’s benefits and “free cash” from the various COVID government programs. This planning all must be done concurrently with planning for PPP loan forgiveness since any costs used for ERC can not be used for PPP loan forgiveness or vice versa——-For employers who can benefit from multiple programs (say PPP and ERC and certainly restaurants/bars with the new grant program), make sure your advisor is an expert in planning to optimize these program benefits or can refer you to a consulting firm which specializes in optimizing benefits/free cash from these programs. Your first inquiry should be to your CPA firm who knows your business. WE HAVE YET TO SEE ANY SOFTWARE TOOL/SPREADSHEET TEMPLATE WHICH SORTS THESE COSTS BY PROGRAMS AND TIME PERIODS—–TO DATE, OUR UNDERSTANDING IS THIS IS “HAND WORK,” and unique to each employer——Based on the dollars which may be involved in optimizing your benefits, we view this as a “premium, high value” planning project (and we have no vested interest in saying that!!)
HERE IS WHAT ACCUPAY ENVISIONS AS A BASIC PLANNING MODEL TO OPTIMIZE YOUR FINANCIAL BENEFITS
Since both PPP loan forgiveness and the restaurant grant programs provide the most valuable benefits (need not be repaid and are not taxable) AND they both require hitting “spending targets” to not require repayment, it would seem that identifying costs for these 2 programs which are not eligible for ERC payroll tax credits is “step #1”.
Costs which can be used for PPP loan forgiveness (and also it appears for restaurant grants plus more types!) but cannot be used for ERC tax credit purposes include the following (BUT REMEMBER these costs only count IF paid during the PPP covered period or the restaurant grant covered period):
- Rent—–office, warehouse, storage and equipment
- Mortgage interest on buildings (be careful of related party rents) and equipment loans
- Utilities, phone, internet
- Employer payroll costs which do not qualify as ERC qualified wages/healthcare costs:
- Employer share of retirement plan funding (not employee share)
- Employer share of group disability and group life insurance premiums
- Employer state/local taxes on employees—–unemployment costs is general one here
- Wages paid to “relatives” of a more than 50% owner of the employer (they count for PPP/RRF but not ERC)
- Wages paid to employees in excess of $10K (per year in 2020 and per quarter in 2021)—do not qualify for ERC
- Review the “new” eligible PPP costs outlined in the CAA law enacted on December 27, 2020, which include:
- Business software costs/licensing for HR, payroll, accounting—-we need more guidance/examples from IRS
- Monies spent by the employer to repair damages due to Covid and for remodeling/repurposing due to Covid
- Certain “supplier costs”—-needs further guidance, but believe it would include inventory ordered pre pandemic which spoiled during Covid
- PPE and Covid supplies
- Likely other cost categories—-ask your CPA/tax advisor!!
Calculate/sort all of the above types of expenses which are paid during your “covered period.” Remember, your covered period generally includes 24 weeks/168 days of “costs paid” during that covered period PLUS costs incurred at the end of your 168 day covered period which were paid during your next scheduled payroll or next scheduled payment of invoices such as rent. (Costs in your covered period are those actually paid plus those incurred/accrued and paid shortly thereafter.) Total all of these costs up with a separate total for employer “payroll costs” above which are not eligible for ERC tax credits (since payroll costs must be at least 60% of the total PPP loan proceeds). The “mathematical results” from this “spreadsheet” for PPP loan forgiveness when compared to your actual PPP loan (this concept is identical for both first and second draw PPP loans) will dictate how much more payroll costs you need to “pull” from the ERC eligible costs. THE GOAL OF THIS PLANNING IS TO USE NON ERC-ELIGIBLE WAGES/HEALTHCARE COSTS TO ATTAIN AS MUCH OF YOUR PPP LOAN FORGIVENESS AS POSSIBLE——WHICH RESULTS IN MAXIMUM POSSIBLE WAGES/HEALTHCARE COSTS WHICH REMAIN TO USE FOR ERC TAX CREDITS during your ERC time frame(s).
My sense is to separately calculate your wages/healthcare costs, separated by your ERC timeframe (could be from beginning to end of a government shut down order OR could be calendar quarters based on substantial quarterly declines in gross receipts). Also, within each ERC timeframe, separate into “subsections” which correspond to the PPP (and possibly the restaurant grant) covered period. The end result of this “separate” ERC calculation is to highlight your maximum ERC tax credit AND more importantly highlight which of those ERC eligible costs must be “pulled/sorted/allocated” to the payroll costs needed for PPP loan forgiveness (which must be pulled from the ERC worksheet from the time periods identified as the PPP covered period). ERC eligible wages/healthcare costs which are “outside” the PPP covered period (or the Feb 15, 2020-December 31, 2021 RRF grant covered period) can be used to claim ERC payroll tax credits since they are not being used for PPP/RRF grant purposes.
NOTE—–Experts are conflicted as to whether the wages of greater than 50% owner-employees of a S corporation can be “counted” for ERC purposes—-IRS Notice 2021-20 is clear that “relatives” of the greater than 50% owner-employees’ wages can not be counted for ERC purposes (thus allocate all relatives wages to PPP/RRF), but it is less clear about the 51%+ owner-employee (and spouse) as to whether their wages “count” for ERC—–I have talked to CPA’s on “both sides” of this issue and hopefully we will obtain some rather quick IRS guidance on this matter. Remember for PPP loan purposes, an “owner-employee’s” wages are capped at 10/52 of $100K for PPP purposes——SO the ultimate interpretation as to whether owner-employees’ wages count as ERC wages (in particular for 2021 in which up to $10K per employee per quarter of wages qualify for ERC tax credits). ALSO REMEMBER for PPP loan forgiveness purposes that a non-owner employee’s wages are “capped” at 24/52 X $100K since wages of employees who earn above $100K per year do not qualify for PPP loan forgiveness (BUT they may qualify for the restaurant grants – no firm guidance yet.)
THE BOTTOM LINE—–THE MORE YOU KNOW THE MORE YOU GET
So, we have at least 3 different COVID employer stimulus/benefit programs (I did not mention the program for “shuttered venues,” nor did I mention the EIDL loan programs) and different types of costs apply to each program. Some apply to all programs, but the costs must also be “sorted” by different timeframes of PPP covered periods, 2 types of ERC time periods, and the new Restaurant grant program having a defined 2/15/20-12/31/21 time period. This is sort of like putting together a puzzle and you have a puzzle piece with “gray” and the puzzle box picture shows 3 different areas of gray in the puzzle—-so you “try here and you try there” and ultimately it all fits together. However, this “puzzle” is not all “trial and error” but instead a mixture of technical concepts used by “power spreadsheet users”—-as indicated, I have yet in all my extensive research found any “software” or template” in which somebody has programmed all of these concepts into a “plug and play” application. Your investment of funds with an expert in this area should generate an excellent ROI for you!!
ONE LAST THING—–TAX CONFUSION REGARDING ERC CREDITS
The IRS has ruled that economic retention credits for 2020 (via amended payroll tax returns), which you will receive during 2021, require that you increase your taxable net income for 2020 by the amount of the ERC for 2020 which you will receive during 2021. You should talk to your CPA about managing taxes in 2020/2021 regarding your retro 2020 ERC credits (this is the “bad” part of the “mostly good” PPP/ERC changes we started this PayDay article with.)
AccuPay and I personally am happy to work with you and your CPA/consulting firm as to concepts, brainstorming and claiming the ERC tax credit on amended 2020 payroll tax returns or current/future 2021 returns. Comments in this PayDay are based on our knowledge as of this writing, may change, and I may have mis-interpreted some provisions—–so I am eager to hear of any other opinions which are different as these topics are brand new, fluid, ever-changing and absolutely complex!!
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ALMOST FORGOT—-Clients of AccuPay who want us to amend 2020 IRS 941’s OR claim “qualified wages and qualified healthcare costs” in 2021 IRS 941 returns should notify us ASAP, after the end of each calendar quarter. Many of our clients have sent us their spreadsheets (many prepared by their CPA firm) so we can relate to what we are filing as we claim the ERC tax credits in payroll. We are happy to discuss your options with your CPA firm if you like.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.