Q&A about PPP Loans and the Employee Retention Credit
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
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, foreign company workforces can be excluded from the parent subsidiary controlled group.
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?
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 greater than $2.0M be required to fill out the 3509/3510 or just the companies that ask for forgiveness?
For all loans of $2 million the company will be required to fill out the Form 3509/3510.
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.
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.
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 gross receipts are determined on a cash basis.
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.
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 on a cash basis.
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 go. 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. No guidance says that a wage included on the forgiveness application form can be used for an ERC credit, even if the wage put on the form was not needed for full forgiveness.
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 forgiveness of PPP 1 loans of $50k – $150k, does the borrower still has to apply FTE reduction calculation?
Yes, this calculation still needs to be performed for borrowers over $50k. For borrowers under $50k, you will not have to perform a FTE/salary reduction calculation.
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.
If you qualify for the PPP 2 loan for 2021 Q1 (25% revenue reduction), is 2021 Q2 compared to 2019 Q2 only? Or can you compare the total 2021 Q1/Q2 revenues to the total 2019 Q1/Q2 revenues?
To qualify for the PPP 2 loan, compare the 2021 quarter with the comparable quarter in 2019 or 2020, or the entire year, or a 12 month trailing average.
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 existence in the 1st or 2nd quarter of 2019, can compare any 2020 quarter to the 3rd and 4th quarter of 2019.
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?
The business has to be incorporated by February 15, 2020. If the business was incorporated before February 15, 2020, they can still apply for PPP 1 since the company most likely did not receive a PPP 1 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 on a cash basis.
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).
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?
Yes -Solely 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.
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 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.