Q&A about PPP Loans and the Employee Retention Credit
Updated April 27, 2021
Cherry Bekaert’s Tax Team hosted a panel discussion on February 9th about PPP Loans and the Employee Retention Credit. Our guests submitted so many great questions that we decided to share them all with you along with answers from our panelists.
We also are sharing a recording of the panel discussion that you can review and share with colleagues.
Table of contents:
- General Q&A for PPP Loans, ERC Credit and Shuttered Venue
- Q&A for PPP Loans
- Q&A for PPP Second Draw Loans
- Q&A for Employee Retention Credit
- Q&A for ERC for Private Equity, Venture Capital and Family Offices
For PPP, coverage of some costs are allowed (rent, some supplier costs) but you are only allowed to ask for 2.5x payroll costs. How can you include other costs in the application?
For the application, the calculation is only based on payroll and other payroll related items. The other costs, such as rent, mortgage interest, and utilities, are unable to be included for the calculation of the loan amount.
Are banks requesting CPA audited financial statements with a cover letter from a CPA proving the 25% decline in revenue?
We have only seen banks requesting signed internal financial statements. We have not seen banks requesting audited financial statements as audited financial statements are typically on a yearly basis and not by quarter.
When we check the company size, do I need to consider our overseas parent company head count or only our local employee in US?
For PPP, you will need to consider the parent company’s employee count as well. The parent company becomes an affiliate because they have control over the subsidiary. For ERC, only employees providing services within the United States are considered in the full-time employee count for determining an employer size.
If we don’t have unemployment insurance, can we claim unemployment expenses paid to the state as employment costs?
Yes, employer paid state unemployment costs are includable in both the loan application and forgiveness calculations.
Can an entity receive a PPP loan and an SVO grant?
Yes, but an entity that first receives a PPP loan will have that loan netted against its SVO Grant.
Can you elaborate on the “outside payroll costs” for the new non-payroll costs?
New non-payroll costs include:
- Payments for software or cloud computing services that are used to facilitate business operations such as payroll, accounting functions, human resources, sales and billing functions, etc.
- Property damage costs due to 2020 public disturbances that were not covered by insurance
- Supplier costs that are essential to the borrower’s operations and were obligated under contracts or purchase orders in place prior to loan disbursement (more flexible rules apply to purchases of perishable supplies)
- Expenditures for worker protection (e.g., masks and other personal protection equipment, construction of physical barriers, air filter systems, or expansion of additional indoor, outdoor, or combined business space, etc.)
Will all companies with PPP loans greater than $2.0M be required to fill out the 3509/3510 or just companies that ask for forgiveness?
All companies who received PPP loans greater than $2.0M and their affiliates whose PPP loans put the affiliated group over $2.0M are required to complete a 3509 or 3510.
Does the gross receipt reduction have to be pandemic related? If a contract expired in Sept, 2020 and was not renewed does that reduction qualify?
The SBA has not stated that the gross receipt decrease has to be pandemic related, but you will need to evaluate the certifications located at the bottom of the application form to ensure that these apply to you.
In 2020, we transitioned our two separate payrolls (for two distinct businesses) into a single non-revenue generating holding company for payroll purposes (these are related companies). We applied with 2019 payroll data from the standalone companies but 2020 data will be on a combined basis given the consolidation of the payroll paying entity. Any guidance on how best to present this somewhat complicated information for forgiveness purposes?
From a forgiveness perspective, the payroll costs able to be considered as forgiveness costs are only payroll costs that were paid from an entity using the same EIN as the borrower. While a predecessor employer payroll costs could be used for the maximum loan application amount, similar rules are not detailed for loan forgiveness. If you applied for the loan in 2020 from the holding company, the holding company wages will be used for forgiveness, irrespective of what wages were used to determine the maximum loan amount.
What’s the definition of gross receipts?
Gross receipts include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.
For forgiveness of the PPP loan, are furloughs considered for salary reductions?
No, salary reductions are a reduction in the annual salary or hourly wage base. Furloughs need to be considered in the FTE calculation but not the mandatory salary/wage reduction.
When showing decline in gross receipts do you use reduction of revenue or cash receipts?
For PPP, the SBA states that the gross receipts are determined in accordance with the entity’s accounting method. ERC uses the employer’s method of accounting, following the IRC Section 448 rules for other than tax-exempt organizations and IRC Section 6033 rules for tax-exempt organizations.
If a sole proprietor did not include his wages in the original loan, can an amended application be filed?
Yes, you are able to amend your original loan amount if you determine that you did not include all of the wages that could be included as a result of regulatory changes after the application was submitted. Under interim final regulations released in March 2021, a self-employed person filing a schedule C can determine the maximum loan amount based on gross revenue rather than net profit.
Does the 25% reduction apply to PPP 1 loans that are being applied for now or only PPP 2 loans?
The 25% reduction only applies to the PPP 2 loan.
Regarding first time loans and the average payroll calculation, what if the entity reduced payroll significantly during 2020 and the current payroll is different than what the average for 2020 would be. Is there any provision for using the last quarter of 2020 as a basis?
For PPP 2 loans and PPP 1 loans which do not include wages for self-employed persons, the entity is able to use calendar year 2019, calendar year 2020, or a trailing 12 months ending in 2021 in order to calculate the loan amount.
Would you say that most hospitality businesses qualify for the safe harbor 1 on the forgiveness application?
Most qualify for the safe harbor, which is the third option on the 3508EZ, assuming that the business has been impacted due to federal, state, or local COVID restrictions.
For not-for-profits (NFP), I understand that it is based on cash gross receipts?
For PPP, it depends on how the books are kept. If books are kept on accrual, then it’s possible that some non-cash receipts may be counted as part of gross receipts. For ERC, gross receipts are determined following the rules of IRC Section 6033, according to the employer’s method of accounting.
If I am a government contractor, do I need to reduce my indirect overhead cost by the amount of my PPP loan forgiveness? What about the ERC credit?
For both PPP and ERC, this is a complex area, so “it depends.” It will largely depend on your mix of contract pricing types and how overhead or G&A pools are applied. This requires analysis of contract backlog and pricing types.
Do travel agencies qualify as Shuttered Venue Operator Grants if the cruise industry had to cancel the “takeovers” which were previously contracted for in 2020 and 2021?
The rules for shuttered venue operators require, among other things, that there be a paid ticket or cover charge to attend with performances marketed through listings in printed or electronic publications, on websites, by mass email or on social media.
I applied for loan forgiveness before the new law changes at year end. We received the application back for signature to send to SBA. Now I want to take the ERC credit. Do I need to back out those wages from the forgiveness application and use other costs to support forgiveness? Do I need to change my support on the forgiveness application at this point, or sign and go?
I would not sign and back out the wages needed for ERC. If you are confident that no additional wages are needed for complete PPP loan forgiveness, then file for forgiveness. IRS Notice 2021-20, Section I states that a wage included on the forgiveness application form can be used for an ERC credit, if the wage included on the form was not needed for full forgiveness. However, expenses not included on the forgiveness application cannot be assumed to be included to eliminate the need to use certain payroll cost amounts.
Is there a deadline for submitting a loan forgiveness application for a PPP 1 loan?
There is no deadline to submit your loan forgiveness application, but if you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period.
What if I only need 12 weeks for PPP 1 forgiveness? Am I defaulted to a 24-week period?
For loans made in 2020, there are only 2 forgiveness periods, 8 and 24 weeks. However, there is no requirement to use all wages paid or incurred during the covered period for forgiveness. For loans made in 2021, the borrower can use an 8 or 24 week forgiveness period or anything in between those dates.
For forgiveness of PPP 1 loans of $50k – $150k, does the borrower still has to apply FTE reduction calculation?
Borrowers with loans equal to or less than $50,000 can use Form 3508S and not perform a FTE/salary reduction calculation. Borrowers with loans between $50,000 and $150,000 still need to reduce eligible expenses by the FTE calculated percentage.
In the PPP 1 forgiveness process, are we still allowed to use an alternate covered period?
Yes, you are able to use the alternative covered period for PPP 1 forgiveness but not for PPP 2 forgiveness.
For organizations that returned the PPP 1 loan before the safe harbor date, is the best option to reactivate the old loan?
Yes, the first loan would be the only one that you would be eligible to apply for.
Can a business apply for PPP 2 if it used all the PPP 1 loan but not all those the funds were used for qualified expenses?
PPP loan proceeds can only be used for eligible expenses (e.g., payroll costs, rent, utilities, etc.). They do not have to be spent during the covered period, but they do have to be spent on eligible expenses prior to the time the PPP 2 funds are disbursed.
Can you qualify for a PPP2 loan by calculating a revenue reduction for any quarter of 2020? Or can you compared total 2020 revenues to 2019 revenues?
To qualify for a PPP2 loan, the borrower entity must show a 25% revenue reduction in any calendar quarter of 2020 with the same calendar quarter of 2019. Entities may also show the revenue reduction using full year revenues of 2020 compared to revenues of 2019.
Are companies that started in 2019 eligible for PPP 2? They would not have a comparison from 1Q 2019 vs 1Q 2020.
Yes, as long as the entity was in existence on February 15, 2020, and received a PPP 1 loan. Entities not in business in the 1st or 2nd quarter of 2019 must demonstrate the 25% revenue reduction using any quarter of 2020 compared to 3rd or 4th quarter of 2019. Entities not in business in the 1st, 2nd, or 3rd quarters of 2019 must demonstrate the 25% revenue reduction using any quarter of 2020 compared to 4th quarter of 2019. Entities not in business during any of 2019 must demonstrate the 25% revenue reduction using 2nd, 3rd, or 4th quarter of 2020 compared to 1st quarter of 2020.
Does the PPP 1 loan need to be forgiven or paid off before you can apply for a PPP 2 loan?
No, the SBA says that you have to use or will use the PPP 1 funds by the time you apply.
I have a client that just opened in May 2020. Would they be eligible for the PPP 2 loan?
A business must be in operation as of Feb. 15, 2020 in order to qualify for any PPP loan.
The SBA website states that PPP 2 eligibility criteria is fewer than 300 employees, not 300 full-time employees. Is that correct?
Yes, this is correct. This is based on a total number of employees.
Is investment loss allowed to be included when calculating the 25% decline in revenue for PPP 2?
Gross receipts include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. 13 CFR 121.104 which defines gross receipts for this purpose excludes net capital gains and losses.
For PPP 2 loans, can you use bank statements to show reduction in gross receipts (rather than P/L’s)?
Yes, you can use bank statements to show the reduction of gross receipts.
For the 2021 PPP loan, does the gross receipt reduction apply to multiple companies that I own?
Yes, the gross receipt reduction calculation takes into account all affiliated entities for a PPP 2 loan. Once it is determined that the affiliated group of entities has the requisite gross receipts reduction, each company with a separate EIN can apply for their own PPP loan.
For organizations that apply for and receive a second draw PPP loan, is there a single forgiveness application and process for the combined PPP 1 and PPP 2 loan amount or will two separate applications for forgiveness of each draw be required?
There will be separate forgiveness applications for PPP 1 and PPP 2 loans.
One of the qualifiers is having 300 full-time employees or less. Do I need 300 or fewer full-time employees or 300 or fewer total employees? We have about 50 full-time employees, but about 700 total employees.
To be eligible for PPP 2, the 300 limit is TOTAL employees, full time or part time. It is measured as an average of those employed each pay periods for 2020.
My lender is digging deeper on Round 2, using my 2019 calculations provided for Round 1. Could any findings of errors from that work-up adversely affect Round 1 loan forgiveness?
Yes, it’s possible.
How much does the drop in gross receipts need to be to qualify for ERC 2020?
20% compared to the comparable quarter in 2019, determined according to the employer’s method of accounting.
To qualify for the ERC, do you need to show a 20% quarterly reduction in sales or cash receipts?
If you received a PPP loan, can you still apply for an ERC?
Yes, you can apply for both.
On the ERC credit, if we applied for forgiveness for the PPP 1 loan using payroll in a 24-week period, are we still eligible for the ERC credit in other quarters?
Yes if you remain an Eligible Employer in subsequent quarters. Additionally, to the extent that PPP forgiveness allocated to wages is less than total wages in a quarter, you can treat wages in that quarter as ERC-eligible (subject, of course, to the limitation of only including $10,000 of qualified wages per employee). Notice 2021-20, section I allows PPP borrowers to use payroll costs included on the PPP loan forgiveness application to be used as qualified wages for the ERC as long as the amount is not needed for loan forgiveness.
Does the ERC credit only apply to the quarter where revenue is down 20%?
For purposes of the 2021 ERC, that is correct. You need to identify a greater than 20% decline in current Q1 versus Q1 of 2019. Alternatively, you can use Q4 2020 versus Q4 2019. For Q2 2021, you need to identify a greater than 20% decline in Q2 2021 versus Q2 2019, or in the prior quarter (Q1 2021 versus Q1 2019).
Can I choose to assign wages to different employees in the same period separately as ERC qualified wages and PPP forgiveness wages? For example, can I exclude part-time employee wages from PPP loan application and count them as ERC qualified wages?
Does a 25% reduction makes an employer eligible for Employee Retention Credit?
No – the test is a greater than 50% reduction for the 2020 credit and a greater than 20% reduction for the 2021 credit.
For ERC, what is the gross receipts test?
It is based on gross receipts, which is generally reported on the front of the tax return under line 1c, plus dividends, interest, rents, royalties and most “other income” items.
Do Not-for-Profits (NFP) qualify for the ERC based on cash gross receipts?
For purposes of determining eligibility for the Employee Retention Credit, gross receipts for a tax-exempt employer include gross receipts from all operations, not only from activities that constitute unrelated trades or businesses. The definition of gross receipts looks to IRC Section 6033, the amounts reported on Form 990 as gross revenue.
For example, gross receipts for this purpose include amounts received by the organization from total sales (net of returns and allowances) and all amounts received for services, whether or not those sales or services are substantially related to the organization’s exercise or performance of the exempt purpose or function constituting the basis for its exemption. Gross receipts also include the organization’s investment income, including from dividends, rents, and royalties, as well as the gross amount received as contributions, gifts, grants, and similar amounts, and the gross amount received as dues or assessments from members or affiliated organizations.
To determine whether there has been a significant decline in gross receipts, a tax-exempt employer computes its gross receipts received from all of its operations during the calendar quarter and compares those gross receipts to the same gross receipts received for the same calendar quarter in 2019.
Can bonuses be included in gross wages on the Employee Retention Credit?
Yes – the wages are based on what is paid and reported on the W-2s. For 2020, the qualified wages for large eligible employers cannot exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the full or partial suspension of operations or the first day of the calendar quarter in which the employer experienced a significant decline in gross receipts.
For 2020 ERC, once a company has a 50% decrease in revenues for a quarter, they are eligible for ERC for the remaining year? Are gross receipts applied to each quarter separately to determine eligibility?
A company will at least be eligible for the following quarter. Under the Gross Receipts Test, the company will remain an eligible employer until the quarter following the quarter during which the gross receipts decline reaches only a 20% decline as compared to the same quarter in 2019.
Does the credit apply to W2 and 1099 employees?
Only W-2 employees.
If the company did not pay wages to furloughed employees but retained their benefits, such as health insurance, do those health insurance payments qualifying for ERC?
Does a small employer qualify for ERC by calculating the credit on only the wages of the full-time employees or all wages on full-time and part-time employees?
Payments of all W-2 wages for both full time and part time employees would be included. The full time employee test, however, is used to calculate whether you are a large or small employer and the type of wages for which the credit can be claimed.
Is there a limit on the number of employees for ERC?
There is no limit to the extent you are an Eligible Employer. If, however, you had greater than 100 full-time employees in 2019, you can only include wages paid to employees not providing services. For the 2021 credit, if you had greater than 500 full-time employees in 2019, you can only include wages paid to employees not providing services. For companies with fewer than the previously mentioned 100/500 full-time employees, you can include wages paid to all employees (full and part time) in the ERC calculation.
For ERC, Q1 2021 can compare to either Q4 2019 or Q1 2020?
Q1 2021 credits are available if the employer has a gross receipts decline of 20% when comparing Q1 of 2021 with Q1 of 2019 or Q4 of 2020 with Q4 of 2019
Do employers have to file amended 941s for each 2020 quarter to claim the 2020 credit, assuming their 941s were already filed?
Yes. An amended Form 941 is required for each quarter during which the credit is claimed. For 2020, you may meet the $10,000 limit in 1 quarter, necessitating amendment of only one quarter’s return.
ERC 2020 qualification is based on TOTAL Gross Receipts? We had sales of one department decimated over 50% in 2020 but sales of other departments saw less decline.
Yes. Total gross receipts for the entire controlled group
Are the gross wages on which the ERC is based, net of pre-tax deductions? That is how Paycom is calculating it for us.
Gross wages include pretax and after tax deductions. Paycom may be adding the employee share of health benefits with the employer share as allocable health care costs, and eliminating that amount from wages so that they do not double count.
My company is backed by private equity, venture capital or a family office. Does that adversely impact the ability to qualify for ERC?
Not necessarily. Most private equity and venture capital funds structure their investments such that they are not part of a “controlled group”; thus the financial metrics and number of employees do NOT need to be aggregated across each of the portfolio companies to determine eligibility.
My portfolio company was sold in 2020 or 2021. Does this impact my ability to claim ERC credit for the period of ownership prior to the sale?
The ERC can be claimed for prior year employment tax returns. If the sale was a stock sale and the new owner is using the same EIN that was used by the portfolio company, you will need to coordinate this amended tax return with them. The purchase and sale agreement may have addressed this.
If I made an acquisition (or divested a division) during the look back period, how does that impact eligibility given the current and historical periods (pre/post acquisition) aren’t comparable?
There are specific rules which allow an employer to include the gross receipts of an acquired company in its 2019 gross receipts when determining if it is an eligible employer.
My Company has over 500 employees. Can I still qualify for ERC?
For the 2021 credit, if you had greater than 500 full-time employees in 2019, you can qualify for the ERC but the only qualified wages are those paid to employees not providing services. In many cases, these employers have a credit available because they often maintain health insurance for furloughed employees. Health insurance for employees not providing services would be part of qualified wages for the ERC.
Is the calculation based on actual number of employees or average number of employees and over what specific time periods?
The actual employee wages, employee by employee, are included in the calculation.
The average number of full time employees in 2019 is used to determine what wages can be included in qualified wages. This is a monthly average.
What if I use a PEO for payroll reporting?
Companies using a PEO are still entitled to claim the ERC.
Companies may file the Form 7200 to request an advance payment of the ERC.
The PEO should be provided with a copy of the Form 7200 and any other documentation needed by the PEO to include the client’s ERC in the Form 941 Schedule R filed by the PEO.
How do I get the credit; what forms do I need to file?
For the 2020 ERC: file Form 941-X (Amended Employer’s Quarterly Federal Tax Return)
For the 2021 ERC: file Form 941 to report the credit (Employer’s Quarterly Federal Tax Return) or on Form 941X, if necessary. Future 2021 tax deposits may be reduced to utilize the credit
To file for an advance from the government of the 2021 ERC, file Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
When can we expect to receive the refund? Can I expect a refund in both years or a credit?
When filing for a refund with a Form 941-X, it will take longer to get a refund check from the government than it would to report a credit that can then begin to be used against 2021 payroll tax liabilities (and allow the taxpayer to reduce remittances of payroll taxes to the government).
Receipts of any overpayments of employment tax resulting from the ERC are dependent upon the timing of processing of the refund check by the IRS.
Do I need to file an amended return?
Companies must claim 2020 ERC credits on an amended payroll tax return (Form 941-X).
On Form 941-X, companies can elect (1) to request a refund of the overpaid taxes or (2) apply the refund toward the next tax period’s federal payroll tax liability (i.e. carry it forward). If they elect the latter, the refund may be used to reduce future tax deposits owed to the IRS and carried forward until the credit is exhausted.
I transitioned to 1099 contractors to save on payroll. Is the cost I am paying to 1099 contractors eligible for the credit?
If my company is no longer operating, am I still eligible for the credit?
If the company was in a trade or business in 2020, and was an Eligible Employer in 2020, the company could apply for a refund of 2020 payroll taxes.
How does this program interact with PPP loans? Does participation in one program affect eligibility for the other? If not, do PPP loan proceeds count toward revenue for purposes of the 20% reduction test?
The payroll costs used for PPP loan forgiveness cannot also be used for the ERC. Employers should analyze wages paid to each employee to determine whether a specific wage should be used for an ERC or PPP loan forgiveness.
Forgiveness of PPP loans are included in gross receipts for the gross receipts test.
If my PPP loan fully covers my payroll, can I still get credit for the payroll prior to when I actually received the PPP loan? How is the credit impacted if I am approved for a new PPP loan (application is in process)?
The ERC applies to wages paid each quarter, while the PPP applies to periods that may begin in one quarter and end in another quarter.
The taxpayer may not claim an ERC for wages paid to an employee if those wages are used for PPP forgiveness.
An Eligible Employer can use the wages paid to employees in periods both before and after the PPP loan covered period that are not used for PPP loan forgiveness. In addition, some of the wages during the covered period can likely be used for the ERC, due to various limits that apply and the fact that the PPP loan covered period is longer than the period used for calculating the maximum loan amount.