ERC and PPP Filing Related Questions & Concerns

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ERC and PPP are critical programs created in response to the COVID-19 pandemic to provide financial assistance to small businesses.

The Employee Retention Credit (ERC) is a tax credit established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses forced to close or reduce operations due to COVID-19. The credit is available to businesses that experienced a 50% or more reduction in gross receipts in a calendar quarter compared to the same quarter in the previous year. The credit equals 50% of the qualified wages paid to employees during the calendar quarter, up to a maximum credit of $5,000 per employee per calendar quarter.

The Paycheck Protection Program (PPP) is a loan program that was also established under the CARES Act to help small businesses pay their employees and keep them on the payroll during the COVID-19 pandemic. PPP loans provide a direct incentive for small businesses to keep their workers on the payroll. The loans are forgiven if all employee retention criteria are met and the funds are used for payroll, rent, mortgage interest, or utilities.

Questions and Concerns Regarding the Filing of ERC and PPP

Both the ERC and PPP are beneficial for businesses impacted by COVID-19. The ERC provides a tax credit to help businesses offset the cost of paying employees during times of reduced operations, while the PPP offers a low-interest loan to help businesses pay their employees and keep them on the payroll.

However, businesses may have several filing questions and concerns regarding these programs. Here are a few of the most common:

How do I know if I’m eligible for the ERC or PPP?
To be eligible for the ERC, a business must have experienced a 50% or more reduction in gross receipts in a calendar quarter compared to the same quarter in the previous year.

To be eligible for the PPP, a business must have 500 or fewer employees and must have been in operation on February 15, 2020.
How do I apply for the ERC or PPP?
To apply for the ERC, businesses must file Form 941, Employer’s Quarterly Federal Tax Return, and claim the credit on the form.

To apply for the PPP, businesses must complete a PPP loan application and submit it to a participating lender.
Can I apply for both the ERC and PPP?
Yes, businesses can apply for both the ERC and PPP. However, the same wages cannot be used to claim both credits.
How do I calculate the amount of the ERC or PPP that I’m eligible for?
To calculate the amount of ERC a business is eligible for, the business must first determine the amount of qualified wages paid to employees during the calendar quarter. The credit equals 50% of the qualified wages, up to a maximum credit of $5,000 per employee per calendar quarter.

To calculate the amount of PPP a business is eligible for, the business must first determine its average monthly payroll costs. The loan amount is then equal to 2.5 times the business’s average monthly payroll costs, up to a maximum loan amount of $10 million.
How do I claim the ERC or have my PPP loan forgiven?
To claim the ERC, businesses must file Form 941 and claim the credit on the form.

To have a PPP loan forgiven, businesses must use the loan proceeds for eligible expenses (such as payroll, rent, mortgage interest, and utilities) and meet certain employee retention criteria.
Can I file for the ERC credit before PPP loan forgiveness?
TFiling for the ERC credit before receiving PPP loan forgiveness raises a few concerns. Many businesses applied for PPP forgiveness before the Consolidated Appropriations Act passed, which means their reported wages for PPP forgiveness were not eligible for the ERC credit in 2020. These businesses may be able to file amended 941X forms for the ERC credit for Q2 2021 as long as they conclude their PPP second-draw covered period by the end of Q3 2021.
If I file for the ERC before PPP loan forgiveness, are there any potential financial losses?
There is a financial issue with filing for the ERC credit before receiving forgiveness for the PPP loan.

For example, if a business received a second-draw PPP loan of $500,000 in January and had $300,000 in wages in Q1 and Q2, which is enough to cover the PPP loan when applying for forgiveness, but the business reports $150,000 in wages for each quarter as eligible for the ERC, only $200,000 in wages will be left for PPP forgiveness. To maximize PPP loan forgiveness, at least 60% of expenses must be payroll, so in this case, the business would need to report $300,000 in wages for complete forgiveness.
How do I derive maximum ERC benefits?
To make the most of the ERC, have a plan to minimize surprises when applying for PPP loan forgiveness and track eligible non-payroll expenses.

Businesses can only report about 40% of the loan amount for non-payroll expenses, freeing up wages that can be used for the ERC. Those who applied for PPP loan forgiveness in mid-2020 can also use additional non-payroll expenses like supplier costs, software expenditures, and worker protection expenses to derive maximum benefits from the ERC program.