How PPP Recipients Can Retroactively Claim the Employee Retention Credit for 2020
The IRS recently issued guidance explaining when and how employers that received a loan under the Paycheck Protection Program (PPP) can retroactively claim the employee retention credit (ERC) for 2020. The guidance addresses the ERC program as modified by the Consolidated Appropriations Act of 2021.
While much of the information is already available in the “frequently asked questions” about the ERC, the guidance provided information about the following two previously unanswered questions:
- How does an employer that already filed a PPP loan forgiveness application elect to exclude wages from the ERC?
- How does an employer retroactively claim the ERC?
Election to Exclude Wages from the ERC
A PPP loan recipient generally may now claim the ERC for qualified wages paid to employees, but the wages for which the employer claims the ERC must then be excluded from the payroll costs that qualify for PPP loan forgiveness. An eligible employer generally makes this election by not claiming the ERC for those qualified wages on its federal employment tax return.
However, an employer that received a PPP loan is deemed to have made the election to exclude from the ERC some or all of the wages that it reports as payroll costs on a PPP loan forgiveness application. Specifically, an eligible employer is deemed to have made this election for an amount of qualified wages equal to the minimum amount of payroll costs, together with any other eligible expenses reported on the application, needed to support the PPP forgiveness amount.
Example: Employer X, who received a $100,000 PPP loan, paid $100,000 of qualified wages and $30,000 of other eligible expenses during the second and third quarters of 2020. In order to receive forgiveness of the entire PPP loan, Employer X was required to report a minimum of $60,000 of payroll costs ($100,000 x .60). Employer X submitted a PPP loan forgiveness application and reported $100,000 of qualified wages as payroll costs in support of forgiveness of the entire PPP loan. Employer X did not report the $30,000 of other eligible expenses on the application. As a result, Employer X is deemed to have made an election to exclude $100,000 of qualified wages from the ERC. Although Employer X could have reported $30,000 of eligible expenses (other than payroll costs) and $70,000 of payroll costs, Employer X reported $100,000 of qualified wages as payroll costs on the PPP loan forgiveness application. Consequently, none of the $100,000 of wages may be treated as qualified wages for purposes of the ERC.
If Employer X had reported $70,000 of qualified wages and $30,000 of other eligible expenses on its PPP loan forgiveness application, then Employer X could treat $30,000 ($100,000 – $70,000) as qualified wages for purposes of the ERC. Similarly, if Employer X had paid $150,000 of qualified wages and reported that amount of wages on its PPP loan forgiveness application, then Employer X could treat $50,000 ($150,000 – $100,000) of as qualified wages for purposes of ERC.
If an employer reports any qualified wages as payroll costs on a PPP loan forgiveness application, but the loan amount is not forgiven, those qualified wages may then be taken into account for purposes of the ERC. Similarly, if an eligible employer obtains forgiveness of only a portion of the PPP loan amount, then the employer is deemed to have made an election described above only for the minimum amount of qualified wages reported on the PPP loan forgiveness application that are needed to obtain the forgiveness of that amount of the PPP loan.
Retroactively Claiming the ERC for 2020
An eligible employer that received a PPP loan and did not claim the ERC for 2020 may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to retroactively claim the ERC for each calendar quarter in 2020 in which the employer paid eligible qualified wages. (However, the ERC for wages paid between March 12, 2020, and April 1, 2020, should be claimed on a Form 941-X for the second quarter of 2020. No ERC should be claimed on a Form 941-X for the first quarter of 2020.)
In addition, a special “fourth quarter rule” applies to employers that: (1) received a PPP loan; (2) reported qualified wages paid in the second and/or third quarters of 2020 as payroll costs on a PPP loan forgiveness application; and (3) were denied forgiveness for their PPP loan. Under this rule, such employers may (but are not required to) claim the ERC for the qualified wages paid in the second and/or third quarters of 2020 on a 2020 fourth quarter Form 941-X. This fourth quarter rule also applies to any qualified health plan expenses allocable to the qualified wages paid in the second and/or third quarters of 2020.
For more information about retroactively claiming the ERC and other issues related to the PPP, contact us. We are here to help.