By Evan Kandra
Staff Accountant/Rudler, PSC
Many businesses as still reeling from the effects of the COVID-19 pandemic shutdowns, the Great Resignation, and supply chain issues. Hopefully, your business was one of many that took advantage of the Paycheck Protection Loan Program (PPP) and the Employee Retention Tax Credit (ERC).
PPP forgiveness
As a reminder, when the CARES Act was passed in 2020, one of the main provisions was the PPP. While there were several requirements needed to be eligible to access these forgivable loans, small businesses with 500 employees or less were able to borrow up to $10 million to keep their organizations going during those unprecedented times (see a full list of eligibility here).
There were two rounds of distributions, and while loan forgiveness for the first round has already passed, businesses who received round two distributions still have time to get those loans forgiven.
Evan Kandra
When a business receives a PPP loan, the organization has 24 weeks to spend the money on qualified expenses. After those 24 weeks have passed, the business has 10 months to get the loan forgiven. The 10-month forgiveness window is quickly approaching for those that received the round two distributions.
If you think your business qualifies for PPP loan forgiveness, you should get in touch with your accountant or financial advisor to guide you through the process. Some things you may need for the loan forgiveness application include:
• Utility bills
• Rental agreements and rent invoices
• Payroll documentation
• Bank statements (especially if the loan forgiveness application is going through a different bank than your organization typically uses for financing)
ERC Forgiveness
Another upcoming deadline is tax filing for the ERC, which is a refundable tax credit given to businesses who qualified. For 2020 the credit is worth up to 50% of $10,000 in qualified wages per employee for the year. For 2021 the credit is worth up to 70% of $10,000 in qualified wages per quarter. Note that these calculations exclude majority business owners.
The qualifications for ERC eligibility are more complex than those of the PPP loan, especially because eligibility requirements changed from when the tax credit was first introduced to now. One of those changes was that even if a business qualified for a PPP loan, an Economic Injury Disaster Loan (EIDL) and the ERC, a business could only receive one. Now, if a business qualifies for all three, they can receive all three – although this comes with certain conditions.
For example, if you qualify for both the PPP loan and ERC, you cannot include the wages used for the PPP loan forgiveness in the ERC when amend your payroll taxes (or no “double dipping,” so to speak).
Now, if we are speaking strictly of the ERC, there are two straightforward manners in which you can test your eligibility. One, is the gross receipts test. In 2020, if you had a 50% decline in revenue in a quarter compared to that same quarter in 2019, you would qualify. To keep it simple, if in the second quarter of 2019, your business had $100 in total receipts, and then only had $50 of total receipts in the second quarter of 2020, you would qualify for the ERC for that quarter. In addition, if your business qualified in one quarter via the gross receipt test, like quarter two in our example, you would automatically qualify for the next quarter – quarter three.
The gross receipts test changed slightly in 2021: A business only needed a 20% decline in revenue for a quarter compared to the same quarter in 2019. Keeping our same example, if the business made $80 in the second quarter of 2021 (an improvement on 2020, but still less than 2019), they would qualify for 70% of the $10,000 in wages for ERC, or $7,000 per employee, rather than $5,000.
COVID-19 grants and PPP loan forgiveness are not included in the gross receipt number to determine eligibility.
The second straightforward test to determine eligibility is the Partial Shutdown Test. Essentially, if a business had to be closed or operations were limited due to executive orders by state or city, they could qualify for ERC for the time they were unable to operate.
For example, many states shut down or reduced indoor dining capacity for restaurants, which greatly reduced sales for many of those businesses. Those restaurants with indoor dining qualify from the date they were shut down to the date they re-opened to full capacity. This test is not by quarter or any other timeline. Some supply chain disruptions also have qualified organizations for this credit, but the requirements are complex.
Before filling out your payroll tax return or Form 941x, talk to a professional to help you determine if you qualify and provide support through the filing process. Businesses have up to three years from the date the return was filed to amend their payroll tax return and file, so they have time to consult an expert to receive those credits. It’s also worth noting that it could take a while to get that tax credit back. At Rudler, we have seen it take as long as six to eight months.
PPP Loan forgiveness applications and filing for ERC can be a complex process. If you have any questions about how to apply for loan forgiveness, or amend your payroll tax return, don’t hesitate to contact your local tax experts to learn more.
