Employee Retention Credit and Paycheck Protection Program (PPP) Forgiveness
If you are considering a PPP loan, you may be wondering if you can take advantage of the Employee Retention Credit. There are some important factors to consider, including how much you are willing to pay in non-payroll costs, and how long you have to claim it.
Pay for the highest operating cost of your business
If you’ve recently taken out a PPP loan, you might be wondering if you’re eligible for the Employee Retention Credit. Luckily, it’s not too late to claim the ERC for your business, but first, let’s look at the big picture.
The Employee Retention Credit is a free tax credit available to qualifying small businesses and nonprofits. Specifically, the credit is a paper check paid to your business by the IRS. Unlike a PPP loan, which is based on 2.5 months of payroll wages, the ERC allows you to use your tax refund to make payroll, hire back former employees, or even spend it on other business operations.
In addition to the PPP loan, the ERC is the best way to pay for the highest operating cost of your business. This includes salary, taxes, rents, royalties, and other expenses. Its name is derived from the acronym PPP, which stands for Paycheck Protection Program. You can qualify if you have less than 500 employees.
If you have already qualified for the ERC, you can take the next step and apply for the PPP Loan Forgiveness. This is the most important part of the plan. With the help of a financial advisor, you can learn more about your eligibility for this program.
Although the Employee Retention Credit isn’t eligible for all companies, the PPP loan is. It was designed to help American small businesses with COVID-19 ailment. Since it was launched in 2016, the program has given out more money than any other relief program in the CARES Act.
While you’re at it, be sure to use every tool in your arsenal to ensure your business isn’t double dipping. There are many small business loans and financial tools out there to choose from, so it pays to do your homework. A well-crafted strategy is the key to long term success. After all, this is your company, so it deserves the best possible treatment.
To find out if your business is eligible for both programs, you’ll need to calculate your gross receipts and if you have employees, their paychecks.
Deadline to claim
There are a few things you need to know about the Employee Retention Tax Credit and PPP before you decide to file your taxes. First, the credit is not for all businesses. It is only available to those who qualify, which means that you are not likely to receive any of the benefits if your business is not in good shape. The good news is that the deadline to claim the ERC and PPP is not far away, so get your tax forms prepared today.
The Employee Retention Tax Credit and PPP are linked, so you can claim both opportunities if you’re eligible. Specifically, the ERTC and PPP are designed to encourage businesses to retain employees. If you’re interested in maximizing the benefits of both credits, contact Ogletree Deakins. They are constantly monitoring the newest developments in the payroll tax landscape. For more information, check out their blog, podcasts, and webinars.
To make the most of the ERTC and PPP, you need to understand what it is and how it works. You also need to determine if your business qualifies. This can be a daunting task, especially if you haven’t made a lot of progress in the past year. Fortunately, there are flowcharts that will help you calculate how much you can claim.
The ERTC can be claimed against wages paid to qualified employees. In addition, you can claim the ERTC on the health expenses you pay your employees. Qualified health expenses can include prescription medications, doctor visits, and even medical equipment. These expenses must have been paid after March 12, 2020.
Another option is the Paycheck Protection Program (PPP). This is a federal loan program that provides financial support to struggling businesses. When the program was launched, it was not available to all businesses. However, since the loan was created in 2013, some companies have been able to benefit from it.
As a result, the ERTC and PPP can make a difference in a company’s fortunes. In fact, there are millions of dollars in tax credits that have been claimed by many employers.
Non-payroll costs on PPP loan forgiveness
Paycheck Protection Program (PPP) loan forgiveness can be received if borrowers meet certain criteria. However, non-payroll costs may reduce the amount that is forgiven.
Non-payroll expenses include electricity distribution charges and electricity supply charges. They must be paid in full on or before the next regular billing date. The sum of eligible non-payroll costs can’t be greater than 40% of the amount that is forgiven.
Before June 5, 2020, the original covered period was eight weeks. This was changed later to a 24-week period. During the covered period, borrowers must reduce the number of employees by the average percentage of the reduction in full-time equivalent (FTE) employees. Employee wages and qualified wages are excluded from the calculation.
Loan forgiveness is capped at 2.5/12 of the total compensation that an employee receives in 2019 or 2020. An individual is considered a full-time equivalency employee if he or she works 40 hours or more per week. If the workforce is below this level during the last covered period, there is no need to make a reduction.
PPP loan forgiveness can be claimed if the borrower’s qualified wages are less than the payroll costs listed in the PPP loan forgiveness application. For example, let’s assume X Co. has 8.0 FTE employees during the covered period. A qualified wage is an hourly wage that was reduced from $20 to $15 during the covered period.
To calculate the ERC, the borrower must subtract the salary/wage amount that was lowered from the total salary/wage for the employees that were affected. For example, if the employer had 8.0 FTE employees and the employee A had his hourly wage reduced from $20 to $15, the ERC amount would be $83,333.
In addition to payroll costs, the borrower must use 60% of the loan proceeds to pay for other expenses. These expenses can include electricity distribution charges, electricity supply charges, and worker protections. Workers are protected to ensure their safety.
Unlike other economic relief programs, PPP does not compute forgivable payroll costs based on the amount of funds used. Instead, the IRS deems the employer to have made an Election when the amount of the payroll cost listed in the PPP loan forgiveness application exceeds the payroll cost of the other FTE employees.
IRS’ position on employee retention credit and PPP
Many small businesses may be wondering if it’s too late to claim Employee Retention Credit (ERC) funds. However, there are still opportunities for ERC allocations, especially for those that are able to apply for PPP loan forgiveness. In order to maximize these opportunities, employers need to follow IRS guidance closely.
The Consolidated Appropriations Act, 2021 (CAA) was enacted in March 2021, and extended the employee retention credit and PPP. This legislation was designed to encourage businesses to retain employees, and provide relief to those who needed help. Nevertheless, the legislation has created complexity for those who seek to claim ERC.
If you are a business with employees that are earning at least $10,000 per quarter, you can claim the ERC. Specifically, you can receive a refund from the IRS for up to $10,000 of qualified wages paid to each eligible employee. Generally, the refund is in the form of paper checks.
To determine whether you can claim the ERC, you need to look at several factors. For example, you need to compare your gross receipts for 2020 and 2021 to the gross receipts you had in the same calendar quarter of the previous year.
Another consideration is how your payroll costs compare to the amounts of the loan you have received from the Paycheck Protection Program (PPP). A common scenario is an employer who has received a PPP loan, but has not claimed ERC.
An employer that received a PPP loan may qualify for ERC retroactively if it was required to pay wages for a period of time. However, the amount of the ERC that is allowed to be applied towards repayment of a PPP loan depends on the amount of the loan. It is recommended to seek professional advice to ensure that you are maximizing your ERC allocations.
Some employers were hoping to claim the ERC retroactively in the first quarter of 2021. However, this was not possible, as the first quarter of 2020 does not qualify. Despite this, many employers still hope to claim the credit in 2022.
Businesses with a significant delay in their operations should expect to face partial suspension or full scrutiny from the IRS. Additionally, the IRS does not offer objective tests to determine how long a company should suspend its operations.