March 16, 2021 – Legislative Update: Summary of Guidance Regarding ERC and PPP Interaction, Including Examples
The new IRS Notice 2021-20 provided some needed guidance on how to handle the interaction between ERC and PPP, especially in cases where the taxpayer has already applied for PPP loan forgiveness.
The basic rule is that any wages included on a PPP loan forgiveness application—that are above and beyond the minimum required to receive full forgiveness—will still be available to use as qualified wages for the ERC.
The Notice 2021-20 further clarifies, if a business…
- Reports more wages than necessary to receive forgiveness, the excess wages may still be used for ERC;
- Can demonstrate (document) that they have both qualified and non-qualified wages with respect to ERC, they may consider the wages on the loan forgiveness application to be the non-qualified wages;
- Did not include any non-payroll qualified expenses on their PPP loan forgiveness application, they may not consider those expenses when determining which wages are now excluded from consideration for ERC. That said, it remains an open question if a business is able to amend a previously filed loan forgiveness application to include those expenses. The Notice would seem to allow liberating those wages for ERC if amending the application is a viable possibility.
What this means
If a business has not yet filed their loan forgiveness application, the following should be considered to maximize the opportunity for ERC qualified wages:
- Use the option to receive forgiveness based on up to 40% non-payroll qualified expenses.
- Differentiate between ERC qualified and non-qualified wages and be able to document that the non-qualified wages are the wages included on the forgiveness application.
The following is a matrix summarizing the conclusions of the examples presented in the Notice. Each example corresponds directly with each example provided in the Notice