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updated: 5/20/2021 10:53 AM

Balancing PPP second draw & ERTC to maximize forgiveness & tax credits

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  • Brian Smith

    Brian Smith

 
By Brian Smith
Restaurant Accounting Services Inc.

Many questions continue to arise about the legislation and stimulus provided by Congress surrounding the pandemic.

The major players, the Paycheck Protection Program and the Employee Retention Tax Credit, serve some much-needed relief for small businesses, but the million-dollar question remains:

How can you utilize the aid while maximizing your forgiveness and tax credits?

We have you covered.

The following information discuses top strategies for balancing both the PPP and the ERTC and how finding the fine line within the balancing act will enable businesses to position themselves much stronger so that they can maximize forgiveness.

What has changed in 2021 for PPP borrowers regarding the ERTC?

• PPP borrowers can now qualify for the ERTC;

• The ERTC can be claimed for wages paid in the first and second quarters of the year;

• The qualification requirements for the ERTC have been updated to allow more businesses to qualify (and that is on top of allowing PPP borrowers to claim the ERTC);

• The eligible wage amount has been increased to $10,000 per quarter (per employee), as opposed to 2020, the eligible wage amount was $10,000 per year (per employee);

• The credit is now 70% of the aforementioned eligible wages, whereas in 2020 the credit was at 50%.

How do the ERTC and PPP loan interact?

• There's no double-dipping. A payroll expense cannot be claimed as an ERTC wage and also claimed on the PPP forgiveness application as a forgivable payroll cost. So just if you pay someone a wage, you can either take it for PPP forgiveness or for the ERTC, but not for both loans.

What strategies do businesses need to consider in order to maximize both the ERTC and the PPP second-draw loans?

There are a lot of things to consider, and every borrower situation is going to be different, so there's no one-size-fits-all for this question, however, some general strategies are as follows:

• You could delay the PPP loan to allow more of first-quarter wages to go toward ERTC;

• Shoot for 60% payroll costs on your second-draw loan. This will allow more wages to be eligible for ERTC and hitting that 60% non-payroll cost should not be a problem for PPP second draw because they've greatly expanded the definition of non-payroll costs to include what they call supplier costs (basically, inventory, perishable goods, your food). So if you're allowed to have perishable goods, inventory count toward non-payroll cost at 40% should not be a problem. So if you keep your payroll cost to 60% non-payroll costs 40%, that will leave much more wages for the ERTC.

• The last thing that borrowers can consider when trying to develop a strategy is that now the borrower can choose any covered period they want, which begins the day that they receive their PPP second draw and ends at least eight weeks later but no later than 24 weeks. So, for example, a borrower can choose a nine-week and three days covered period because they used all of their PPP funds in that time frame. This really allows businesses to separate the time frames that they're using for PPP and the time frames that they're using for the ERTC, which will ultimately greatly maximize the amount of wages that are eligible for ERTC.

Are there any differences in the tax treatment of the ERTC and the PPP forgiveness?

• The money received from both the PPP and the ERTC are tax-free, so those are the same between both programs, but there are still some tax differences elsewhere:

• The expenses that are paid for with forgiven PPP funds are tax-deductible on your year-end tax return;

• The ERTC wages that calculated the ERTC credit are not eligible, so they are not tax deductible at the end of the year.

• Brian Smith is the director of compliance at Restaurant Accounting Services, Inc.