Many questions continue to arise about the legislation and stimulus provided by congress surrounding the pandemic. The major players: Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC) serve some much-needed relief for small businesses, but the million-dollar question remains: How can you utilize the aid while maximizing your forgiveness and tax credits?
We got you covered. The following information discuses top strategies for balancing both the PPP and the ERTC and how finding the fine line within the balancing act will enable businesses to position themselves much stronger so that they can maximize forgiveness.
What has changed in 2021 for PPP borrowers regarding the ERTC?
- PPP borrowers can now qualify for the ERTC
- The ERTC can be claimed for wages paid in Q1 and Q2
- The qualification requirements for the ERTC have been updated to allow more businesses to qualify (and that is on top of allowing PPP borrowers to claim the ERTC)
- The eligible wage amount has been increased to $10,000 per quarter (per employee), as opposed to 2020, the eligible wage amount was $10,000 per year (per employee)
- The credit is now 70 percent of the aforementioned eligible wages, whereas in 2020 the credit was at 50 percent
How do the ERTC and PPP loan interact?
There’s No Double Dipping: A payroll expense cannot be claimed as an ERTC wage and also claimed on the PPP forgiveness application as a forgivable payroll cost. So just if you pay someone a wage, you can either take it for PPP forgiveness of for the ERTC, but not for both loans.
What strategies do businesses need to consider in order to maximize both the ERTC and PPP second draw loans?
There are a lot of things to consider, and every borrower situation is going to be different, so there’s no one size fits all for this question, however, some general strategies are as follows:
- You could delay the PPP loan to allow more of Q1 Wages to go towards ERTC
- Second draw applications will be accepted through March 31, 2021. That being said, there’s a fine line between waiting too long to get your PPP Loan and the funds running dry. The funds ran dry on the first round pretty quickly, but they put more qualifications on PPP second draw so the funds may last a little longer this time around – but it is still a risk that every restaurant needs to think about when they’re deciding when to apply for PPP second draw and then of course, are we going to take the ERTC with that?
- Shoot for 60 percent payroll costs on your second draw lone. This will allow more wages to be eligible for ERTC and hitting that 60 percent non-payroll cost should not be a problem for PPP second draw because they’ve greatly expanded the definition of non-payroll costs to include what they call supplier costs (basically, inventory, perishable goods, your food). So, if you’re allowed to have perishable goods, inventory count towards non-payroll cost at 40 percent should not be a problem. If you keep your payroll cost to 60 percent non-payroll costs 40 percent, that will leave much more wages for the ERTC.
- The last thing that borrowers can consider when trying to develop a strategy is that now, the borrow can choose any covered period they want, which begins the day that they receive their PPP Second draw and ends at least eight weeks later but no later than 24 weeks. So, for example, a borrower can choose a nine-week and three days covered period because they used all of their PPP funds in that time frame. This really allows businesses to separate the time frames that they’re using for PPP and the time frames that they’re using for the ERTC which will ultimately greatly maximize the amount of wages that are eligible for ERTC.
Are there any differences in the tax treatment of the ERTC and the PPP forgiveness?
The money received from both the PPP and the ERTC are tax-free, so those are the same between both programs, but there are still some tax differences elsewhere:
- The expenses that are paid for with forgiven PPPP funds are tax-deductible on your year-end tax return
- The ERTC wages that calculated the ERTC credit are not eligible, so they are not tax-deductible at the end of the year.