When the COVID-19 pandemic ground the economy to a halt in 2020, governments across the world took measures to keep businesses afloat. In the United States, the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) were part of these efforts.
When the ERC and PPP loans were first enacted in March 2020, businesses had to choose one or the other. That changed upon passage of the Consolidated Appropriations Act of 2021, which allowed employers to benefit from each program, both retroactively and in 2021. At the same time, the CAA introduced complexity for employers with considerations of when they can apply for both programs, if there are repercussions for doing so, and the timing of such applications. For instance, while employers could pursue ERC even if they claimed a PPP loan, the wages used to justify PPP forgiveness cannot be used as qualified wages for ERC.
To resolve common concerns surrounding both the ERC and PPP loans, employers should have a complete understanding of both programs and the differences between them.
Before exploring the ERC, it is essential for employers to determine if they may be eligible. Businesses that are not eligible should not submit a claim for the ERC.
Overview of the ERC and PPP Loans
PPP loans were created in March 2020 to provide financial assistance to small businesses so they could continue to employ their workforce during the COVID-19 crisis. The forgivable loans were administered by the Small Business Administration (SBA).
Small business owners could apply for the first or second draw through an SBA-backed bank or lender, and funds were deposited directly into the business’s bank account, provided they were approved. PPP loans were intended to be used for payroll or other operating costs such as rent, mortgage interest, or utilities.
In order to have the loan forgiven, business owners had to spend at least 60 percent of the funds on payroll. The remaining balance could be used for utilities, rent, personal protective equipment (PPE) for employees, etc.
Like the PPP loan, the ERC was also created during the COVID-19 pandemic to help small businesses recover from the economic fallout, in this case, as a refundable payroll tax credit. The ERC was introduced in 2020 by the Coronavirus Aid, Relief and Economic Security Act (CARES) to incentivize employers to retain employees during the pandemic. As such, it was a financial lifeline for many companies and their employees.
Unlike PPP loans, ERC claims are filed with the Internal Revenue Service (IRS) who remits any refunds via a check to the employer. As a result, once received there are no restrictions on how the money is used.
Differences Between the ERC and PPP Loans
Both the ERC and PPP loans were designed to support businesses that struggled financially as a result of the pandemic. However, there are several noteworthy differences between these two programs.
Type of Funding
One of the differences between ERC and PPP loans is the type of funding. The PPP offers a forgivable loan. If employers used the funds on payroll, rent, and other qualifying expenses, they do not have to repay the loan. Still, if they used part of the loan for non-qualifying expenses, that portion will not be forgiven. Instead, employers repay the non-forgiven of the loan with a fixed interest rate of 1% and a maturity date of at least two or five years, depending on when SBA approved the loan. On the other hand, the ERC is a tax credit that employers do not have to repay.
Funding Time
If employers qualified for the PPP loan, they would have received the funds via direct deposit. The ERC, however, is distributed after employers file Form 941-X and the IRS reviews the claim. After processing the credit, the IRS sends a refund check. This refund process can take anywhere from 3 to 12 months.
Possible Costs
It was free to apply for the PPP loan. Employers would only incur a cost if they did not use the loan proceeds on qualifying expenses, having to pay it back. There are no costs related to the ERC either since it is a tax credit that employers can receive by filing an amended payroll tax return for each quarter in which they claim credit. The only expense they may face would be service charges if they ask an accountant or tax professional to assist in preparing and filing their tax forms.
Applying for the ERC and PPP Loans
Employers can no longer apply for a PPP loan. The ERC, which was originally scheduled to expire on December 31, 2021, was retroactively sunset on September 30, 2021 by the Infrastructure Investment and Jobs Act (IIJA) for most employers. However, if employers believe that they were eligible for the ERC in 2020 or 2021, it is not too late to claim the credit. Employers may amend the original Form 941 by filing Form 941-X up to three years after the original Form 941 was filed. All Forms 941 in a calendar year are deemed filed on April 15 of the following year; therefore, for example, if an employer wishes to claim ERC for the second quarter of 2020, they must file their Q2 2020 Form 941-X before April 15, 2024.
Preparing for Possible ERC Audits
The PPP loans were an $800 billion government spending program and, as such, caused some bad actors to improperly or fraudulently seek funds and loan forgiveness. A growing number of cases exposed sophisticated interstate and international fraud schemes involving multiple individuals. As a result, other COVID-19 fraud investigations are also evolving.
Therefore, it is not surprising that the IRS is taking a closer look at ERC claims and warning employers about disreputable ERC mills.
Beyond assessing whether the credit was calculated accurately, related individuals were properly excluded, and entity aggregation was correctly accounted for, the IRS is primarily investigating the facts and circumstances during the pandemic leading the employer to claim their business is eligible for ERC—whether they are eligible to claim the credit at all. Another important element being examined is whether employers filed amended income tax returns to account for the 280C adjustment on the ERC amount. Taking this into consideration, it is advisable for employers to confirm and document all the specifics of their ERC claims. This includes gross receipts if claiming eligibility due to a significant decline in gross receipts, or records of suspensions and modifications due to a government order. They should retain all documentation for at least four years after the date the credit is paid.
Both the ERC and PPP loans provided support to employers during and after two challenging years of the pandemic. The ERC remains a high-value refundable tax credit that can make a real difference in the finances. If employers find it too challenging to prepare accurate records proving ERC eligibility and stay on top of evolving IRS requirements, they should outsource the entire process to an experienced and trusted tax professional. By relying on up-to-date technology solutions in combination with tax credit specialists, employers can prepare backup information for ERC filings to reduce the fear of a possible audit and know that all records are in order. Streamline your business operations by relying on experts with in-depth knowledge of the recent tax laws who can help you make the most of all your tax-saving opportunities.
