Can You Claim ERC If You Received a PPP Loan?

The COVID-19 pandemic presented unprecedented challenges for businesses across the United States, leading to widespread economic disruption. In response, the federal government introduced various relief measures designed to support employers and their workforces. Among these initiatives were the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP), both aimed at helping businesses navigate financial strain and retain employees.

Understanding the Employee Retention Credit and Paycheck Protection Program

The Employee Retention Credit (ERC) was established as a refundable tax credit against certain employment taxes. Its purpose was to encourage businesses to keep employees on their payrolls, even if operations were fully or partially suspended due to government orders, or if they experienced a significant decline in gross receipts. The ERC applied to qualified wages paid from March 13, 2020, through December 31, 2021, though it was retroactively terminated for most businesses after September 30, 2021. For 2020, the credit was 50% of qualified wages, up to $10,000 per employee annually, meaning a maximum credit of $5,000 per employee. For 2021, the credit increased to 70% of qualified wages, up to $10,000 per employee per quarter, allowing for a maximum credit of $7,000 per employee per quarter.

The Paycheck Protection Program (PPP) was a loan program administered by the Small Business Administration (SBA), designed to help small businesses cover payroll costs, rent, mortgage interest, and utilities. PPP loans offered potential for full forgiveness if at least 60% of the funds were used for payroll costs during an 8-week or 24-week covered period. Businesses could choose a covered period of either eight or 24 weeks. The PPP aimed to provide liquidity to businesses to maintain their workforce and operations.

Evolution of Rules for Claiming Both

Initially, businesses faced a significant restriction: if they received a Paycheck Protection Program (PPP) loan, they were ineligible to claim the Employee Retention Credit (ERC). This rule, outlined in the original Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020, meant employers had to choose between these two substantial government relief programs.

This changed with the enactment of the Consolidated Appropriations Act (CAA), 2021, passed in December 2020. This legislation retroactively amended the CARES Act, allowing employers who received a PPP loan to also claim the ERC for qualified wages paid after March 12, 2020. A fundamental principle introduced by the CAA was that the same wages could not be used for both PPP loan forgiveness and ERC, preventing “double-dipping.” Businesses needed to carefully allocate their payroll costs to maximize benefits from each program without overlap.

Calculating Qualified Wages for ERC with PPP Loan Forgiveness

Determining qualified wages for the Employee Retention Credit (ERC) when a business also received a Paycheck Protection Program (PPP) loan requires careful allocation to prevent “wage stacking.” Wages counted towards PPP loan forgiveness cannot also be claimed for the ERC. This means businesses must prioritize which wages are applied to PPP forgiveness first.

To properly allocate wages, a business should first identify all payroll costs eligible for PPP loan forgiveness during their chosen covered period, which could be eight or 24 weeks. These costs include gross salary, wages, tips, commissions, and paid leave, though cash compensation for individual employees is capped at an annualized salary of $100,000 for PPP forgiveness purposes. After identifying the wages necessary to achieve maximum PPP loan forgiveness, any remaining payroll costs not used for PPP forgiveness can then be evaluated for ERC eligibility. For instance, if a business paid $150,000 in qualified wages during a PPP covered period but only needed $100,000 to achieve full forgiveness, the remaining $50,000 could potentially qualify for ERC, assuming other ERC eligibility criteria are met.

The timing of a PPP loan forgiveness application can impact ERC claims. If a business applied for PPP forgiveness and included certain wages that exceeded the amount needed for forgiveness, the excess wages could still be eligible for ERC. Businesses should meticulously document all payroll records, PPP loan documents, and gross receipts data to support their wage allocation decisions and demonstrate compliance with the non-duplication rule. This detailed record-keeping is essential for audit purposes and to avoid potential issues with the Internal Revenue Service (IRS).

Claiming the Employee Retention Credit and Amending Returns

Businesses seeking to claim the Employee Retention Credit (ERC), especially those that also received Paycheck Protection Program (PPP) loans and are filing retroactively, use IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This form is specifically designed to correct errors on previously filed Form 941. A separate Form 941-X must be completed for each quarter being corrected.

When completing Form 941-X, businesses will report their adjusted qualified wages on Line 30 and qualified health plan expenses on Line 31. The total ERC is then calculated based on these figures, applying the applicable credit percentage (50% for 2020 or 70% for 2021). The form requires taxpayers to indicate whether they are adjusting underreported amounts or claiming a refund for overreported amounts.

Businesses must maintain comprehensive supporting documentation, including detailed payroll records, PPP loan and forgiveness documents, proof of gross receipts decline or suspension of operations, and relevant government orders. These records are not submitted with Form 941-X but are crucial for substantiating the claim if audited. The deadlines for claiming the ERC are April 15, 2024, for 2020 tax periods and April 15, 2025, for 2021 tax periods. Processing times for amended returns can vary, often taking several months to over a year, and the IRS has cautioned about increased scrutiny of ERC claims due to widespread improper filings.