Maximizing COVID-19 Business Relief: Coordinating the ERTC Credit and PPP Loan Forgiveness

The COVID-19 pandemic generated immense economic turmoil and uncertainty for companies across sectors. As part of relief efforts, the government established the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) to assist employers specifically. While originally conceived as separate initiatives, subsequent legislative actions enabled businesses to leverage these programs simultaneously for optimal aid.

This article provides an in-depth guide for employers looking to maximize relief by claiming both ERC and PPP in coordination. We will examine key considerations surrounding eligibility, documentation, claim processes, reconciliation, and compliance for justifiably tapping into these programs in tandem.

Assessing the Dual Benefits of the ERC and PPP

In response to the pandemic crisis, Congress enacted several crucial relief measures assisting companies and employers specifically. Two major programs include:

Employee Retention Credit – The ERC is a refundable payroll tax credit worth up to $26,000 per employee covering 2020 and 2021. It incentivizes retaining staff through business disruptions by providing a retroactive subsidy for labor costs.

Paycheck Protection Program – The PPP facilitated potentially forgivable small business loans mainly intended for payroll, rent, utilities, and other approved uses. It offered an immediate cash flow bridge to maintain operations and staffing levels.

Used together in coordination, the immediate cash influx from a PPP loan combined with the retrospective labor cost recovery of the ERC delivers optimal, multi-faceted aid:

  • PPP offers short-term cash flow relief during COVID-19 crisis periods to enable continued operations and payroll funding when revenues decline.
  • ERC allows recouping previously incurred payroll expenses over the long term, offsetting the retained wage costs after the crisis stabilizes.
  • Dual benefit maximizes liquidity support through economic challenges, while still receiving government subsidies for keeping staff employed.

However, achieving this combined benefit requires an in-depth understanding of the programs and reconciling their different rules and mechanisms.

Changed Rules Allow Coordinated Use of ERC and PPP

Despite their similarities in seeking to incentivize employment retention, the ERC and PPP originally operated as mutually exclusive programs:

  • The CARES Act expressly prohibited employers from claiming ERC amounts on any wages paid for with a forgiven PPP loan.
  • This avoided a perceived double-dip or duplicative benefit for the same underlying payroll costs.

But subsequent legislative actions lifted this restriction to allow coordinated use:

  • The Consolidated Appropriations Act of 2021 enabled employers to claim ERC amounts for wages that were not paid for with a forgiven PPP loan.
  • This opened the door to claiming ERC retroactively on different payroll costs than those offset by PPP funds.

Yet the change also introduced major recordkeeping challenges for employers to accurately determine, track, and substantiate the specific wages that qualify under each program.

Amending Payroll Tax Returns to Coordinate ERC with PPP

The ability to claim otherwise qualifying ERC wages paid outside PPP-funded payroll enables employers to file amended payroll tax returns and obtain additional relief.

Process for amending to coordinate ERC with PPP:

  • Identify quarters with ERC-eligible wages based on COVID-19 impacts, declines, or suspensions.
  • Calculate the portion of wages each quarter that was not paid for by forgiven PPP loan proceeds.
  • Amend Form 941 payroll tax filings for those quarters to newly claim ERC amounts on newly qualified wages only.
  • Provide detailed supporting documentation on the methodology used to determine qualifying wages.
  • Be prepared for heightened IRS scrutiny of amended ERC claims coordinated with PPP forgiveness.

This ability provides enormous potential benefits but also creates compliance risks if amended claims lack adequate substantiation. Consult advisors to ensure amendments adhere to all IRS requirements.

Best Practices for Maximizing Combined COVID-19 Relief

Follow these steps for legally maximizing benefits from both programs in coordination:

Calculate the maximum allowable PPP loan amount

  • Aggregate 2019 payroll costs for all employees and eligible non-payroll expenses.
  • Multiply the total amount by 2.5 to determine the qualified loan amount under program limits.
  • Apply promptly during open PPP application periods based on the calculated amount.

Scrutinize payroll costs at employee and period level

  • Review payroll records from 2020/2021 and identify periods that qualify for ERC.
  • For those periods, determine which employee wage payments were funded by PPP loan disbursements vs. other sources.
  • Exclude any wages covered under PPP from ERC calculations to avoid duplication.

Compile documentation to support PPP forgiveness

  • Maintain detailed records on the use of PPP funds for approved purposes like payroll, rent, and utilities.
  • Confirm full compliance with all program requirements for forgiveness eligibility.
  • Submit the forgiveness application promptly after completing the covered period.

Reconcile PPP forgiveness with qualified ERC wages

  • Verify exactly which wages are being forgiven under the PPP loan.
  • Calculate remaining ERC-eligible wages not absorbed by PPP forgiveness.
  • Retain a detailed schedule demonstrating no duplication across programs.

Amend payroll returns to claim ERC on other wages

  • File amended 941s for ERC-eligible quarters to claim credits only on wages not included in PPP forgiveness.
  • Provide full documentation on the reconciliation of wages between programs.
  • Update worksheet annually when claiming on timely filed returns.

Maintain robust records substantiating the approach

  • Document methodology used to identify wages qualifying under each program.
  • Retain schedules detailing wages claimed under ERC vs. PPP by employee and period.
  • Keep all documentation for a minimum of 6 years.

The Right Way to Leverage COVID-19 Relief in Tandem

Employers who carefully adhere to the following protocol can legally maximize relief by tapping into the ERC and PPP simultaneously:

  1. Fully utilize available PPP loan amounts for permitted uses like payroll, rent, and utilities.
  2. Maintained meticulous tracking of exactly which costs were PPP funded.
  3. Identify periods where ERC eligibility is met based on COVID-19 impacts.
  4. Compute ERC only on wage payments not offset by PPP proceeds.
  5. Claim ERC on amended payroll tax filings with detailed supporting documentation.
  6. Retain reconciliation schedules demonstrating no duplication of benefits.
  7. Provide full transparency to IRS reviewers on coordination methodology.

This enables justifiably availing dual program incentives when in compliance with all applicable rules and limitations.

Why Combined ERC and PPP Relief Maximizes Aid

Using both programs together results in robust, multifaceted support:

  • PPP offers a near-term cash flow lifeline to retain employees through pandemic challenges.
  • ERC allows recouping previously unreimbursed labor costs over the long run.
  • Dual use provides liquidity to survive the crisis, plus offsets the retained payroll expense.
  • Combination optimizes aid compared to claiming only one program in isolation.

Properly administered, the coordinated benefits provide ideal timed relief, both during and after the crisis period.

Potential Pitfalls and IRS Scrutiny of Dual Claims

While legal, claiming both ERC and PPP warrants caution regarding:

  • Complex rules increase audit risks if coordination is inadequately documented.
  • Amended return ERC claims long after PPP receipt draws IRS scrutiny.
  • The inability to prove which wages were allocated to each program can invalidate claims.
  • Insufficient documentation risks the recapture of previously granted relief.
  • Lack of transparency on coordination methodology undermines compliance.

Proactive, air-tight substantiation is required to overcome heightened IRS concerns.

Advisor Guidance Critical for Success

The intricacies involved make consulting experienced advisors essential to ensure full compliance, avoid scrutiny, and maximize benefits, including:

  • Tax professionals to identify eligible periods and proper claim reconciliation.
  • Payroll experts to integrate into withholding systems and amend filings.
  • Accountants to compile documentation and audit support.
  • Attorneys to provide guidance on demonstrating program coordination.
  • CFOs to substantiate financial records and oversee process controls.

Their input provides credibility when navigating dual program claims.

Conclusion

Originally envisioned as mutually exclusive relief initiatives, subsequent legislative changes enable employers to tap into both PPP loan forgiveness and the ERC in coordination. This opens enormous combined benefits to offset COVID challenges. However complex rules for identifying non-duplicative qualifying wages make meticulous documentation and proactive compliance mandatory. With advisors guiding the process, employers can maximize assistance by claiming both of the programs but need extreme care to avoid recoupment and penalties. The time required for proper diligence pays dividends through optimized relief to emerge stronger post-pandemic.

FAQ

Q: Can I claim both the ERC and PPP on payroll costs?

A: You can claim ERC on payroll costs not allocated to forgiven PPP funds. There cannot be duplication.

Q: Do I have to wait to claim ERC until after PPP forgiveness?

A: No, ERC can be coordinated simultaneously provided the same wages are not used for both programs.

Q: What records do I need to claim ERC with PPP?

A: Detailed schedules evidencing which specific wage payments were allocated to each program, by employee and period.

Q: Can I get audited for claiming both ERC and PPP?

A: Yes, dual claims will be closely scrutinized by the IRS so thorough substantiation is crucial.

Q: Should I amend returns to coordinate ERC with PPP?

A: Amending to claim newly eligible ERC amounts is allowed but be prepared for heightened IRS review of changes.

References

IRS Notice 2021-20 – Coordinating PPP loans and ERCs

SBA PPP Loan Forgiveness Application Form 3508 – Reporting other aid

AICPA Recommendations on Coordinating PPP and ERC

Journal of Accountancy Guide to Substantiating Amended ERC Claims

Wolters Kluwer Checklist for Claiming Both ERC and PPP

Thomson Reuters Answers to Top Questions About ERC and PPP Coordination

Contact experienced advisors to ensure compliance when coordinating ERC and PPP claims.

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