Can you take advantage of both

UPDATED With Clarification 3/12/2021:

The short answer is “yes”, in some cases, but it takes an explanation.

The IRS issued guidance regarding the employee retention credit when the taxpayer receives Paycheck Protection Program (PPP) loan forgiveness. 

The employee retention credit is available to all business whose operations were fully or partially suspended due to an order from the government, or for any calendar quarter where the business had a decline in gross receipts of over 50% from the same quarter in the prior year. The business remains eligible until the gross receipts are greater than 80% of gross receipts measured against the same calendar quarter in the prior year. The gross receipts only have to decline 20% for calendar quarters between January and June 2021. 

The retention credit is equal to 50% of wages paid to each employee for each calendar quarter in 2020 with a maximum credit of $5,000 for each employee annually. The credit equals 70% of qualified wages (up to $10,000), per quarter for Q1 and Q2, 2021.  Therefore, the maximum credit for qualified wages paid to any employee is $14,000 for this time period.

Eligibility

Wages paid to related individuals are not eligible for the credit. A spouse is not considered a related individual (and is eligible), but children, parents, brothers, sisters and a few other individuals are treated as related.  Special rules apply for businesses with over 100 full-time equivalent employees during 2019.

Health plan expenses are eligible for the credit.

Wages used for PPP loan forgiveness are not eligible for the employee retention credit.

The business receives immediate benefit of the employee retention credit by reducing the payroll tax deposit for federal, social security tax and Medicare withholding and the business’s share of employment taxes.

Many taxpayers applied for PPP loan forgiveness before this guidance and may have listed more wages on the loan forgiveness application than required. The IRS guidance states the wages ineligible for the employee retention credit are the wages reported on the loan forgiveness application, up to but not exceeding the minimum amount of payroll costs, together with other eligible expenses reported on the application sufficient to support the PPP loan to be forgiven. 

Payroll costs not listed on the loan forgiveness application are eligible for the employee retention credit for eligible businesses.  

Here are examples of how the provision works for eligible businesses with PPP loans forgiven.

Example 1:  Business receives a $100,000 PPP loan and submits the loan forgiveness application reporting $100,000 in wages and related payroll costs. The $100,000 in wages reported on the loan application are not eligible for the employee retention credit.

Example 2:  Business receives a$200,000 PPP loan and submits the loan forgiveness application reporting $250,000 in wages and related payroll costs and no other eligible costs. The $200,000 in wages reported on the loan application are not eligible for the employee retention credit. The remaining $50,000 in wages reported on the loan forgiveness application are eligible for the employee retention credit.

Example 3:  Business receives a $200,000 PPP loan and submits the loan forgiveness application reporting $200,000 in wages and related payroll costs, but doesn’t include $70,000 in other eligible non-payroll costs. The $200,000 in wages reported on the loan application are not eligible for the employee retention credit. 

Example 4:  Business receives a $200,000 PPP loan and submits the loan forgiveness application reporting $200,000 in wages and related payroll costs and $90,000 in other eligible non-payroll costs.  The business was only required to use $120,000 (60% of $200,000) of the PPP loan on wages and related payroll costs. The $120,000 in wages reported on the loan application are not eligible for the employee retention credit. The remaining $80,000 in wages are eligible for the employee retention credit.

Example 5:  Business receives a $200,000 PPP loan and submits a loan forgiveness application reporting $130,000 in wages and related payroll costs and $70,000 of other eligible non-payroll costs. The business incurred $150,000 of eligible wages for the employee retention credit. The business did not experience a full or partial suspension or a reduction in gross receipts of at least 50% during the entire covered period of the PPP loan. The business can prove $100,000 of the wages were incurred while the business was not eligible for the employee retention credit. The $30,000 in wages is not eligible for the employee retention credit. The total wages eligible for the employee retention credit are $120,000. 

For additional information, click here for the IRS Notice 2021-20. It includes frequently asked questions regarding employer eligibility, government orders, full or partial suspension of business operations, significant decline in gross receipts, the maximum employee retention credit, qualified wages and health plan expenses, claiming the credit and special issues for employees and employers. You can also contact us at 401-831-0200.

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