Can You Claim ERC If You Received a PPP Loan?

Understanding Employee Retention Credit Eligibility

The Employee Retention Credit (ERC) encouraged businesses to retain employees during the COVID-19 pandemic. Eligibility required meeting specific criteria: a full or partial suspension of operations or a significant decline in gross receipts.

A full or partial suspension occurred when a governmental order limited commerce, travel, or group meetings due to COVID-19, impacting operations. Examples include orders limiting restaurant capacity, mandating non-essential business closures, or restricting hours. The suspension needed to significantly impact the business.

Alternatively, businesses qualified by experiencing a significant decline in gross receipts. For 2020, a business qualified if its gross receipts for a quarter were less than 50% of its 2019 gross receipts for the same quarter. Eligibility continued until gross receipts exceeded 80% of the 2019 level for that quarter.

For 2021, the gross receipts threshold was lowered; businesses qualified if their gross receipts for a quarter were less than 80% of their 2019 gross receipts for the same quarter. Businesses could also use the immediately preceding quarter to determine the decline. Meeting either a governmental order or gross receipts decline criterion was a prerequisite for claiming the ERC, regardless of other financial aid received.

How Paycheck Protection Program Funds Affect ERC Calculation

Initially, businesses could not claim both the Employee Retention Credit and a Paycheck Protection Program (PPP) loan. The Consolidated Appropriations Act of 2021 allowed both, but prevented “double-dipping” of wages. The non-duplication principle means the same wages cannot be used for both PPP loan forgiveness and ERC calculation.

Businesses must carefully allocate eligible wages to avoid overlap. For example, if a business paid $100,000 in wages and used $60,000 for PPP loan forgiveness, only the remaining $40,000 could be considered for the ERC if they meet qualified wage definitions. Meticulous record-keeping ensures compliance.

Qualified wages for ERC, even with PPP funds, refer to wages paid during the eligible period, including health plan expenses. These wages must not have been included in payroll costs reported for PPP loan forgiveness. Businesses must first determine their PPP forgiveness amount, then identify any excess payroll costs eligible for ERC.

The timing of PPP loan forgiveness applications impacts ERC calculations. Wages paid during the PPP covered period, up to the forgiven amount, are attributed to PPP. Any wages paid outside this period or in excess of the amount needed for PPP forgiveness could be considered for the ERC if the business otherwise qualifies. This requires detailed analysis of payroll records and PPP documentation to segregate wages.

Claiming the Credit and Amending Returns

Businesses eligible for the Employee Retention Credit, even after receiving Paycheck Protection Program funds, typically claim it by amending previously filed employment tax returns. Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is used for this purpose. This form corrects errors on Form 941 or claims a refund of overpaid employment taxes.

When completing Form 941-X, businesses must accurately report qualified wages and the credit amount for each eligible quarter. Section 5 requires a detailed explanation of adjustments, including the reason for claiming the ERC retroactively or due to re-evaluation of eligibility.

Businesses must be precise when calculating the credit, ensuring no wages used for PPP forgiveness are also used for the ERC. The form requires entering total qualified wages and health plan expenses separately for each quarter. The credit reduces the employer’s share of social security tax; any excess is refundable.

After completing Form 941-X for each applicable quarter, forms are submitted to the IRS. Processing time for amended returns can vary, often taking several months to over a year, depending on IRS backlogs and claim complexity.

Documentation and Lookback Periods

Maintaining comprehensive documentation is crucial when claiming the Employee Retention Credit, especially for businesses that also received a Paycheck Protection Program loan. Businesses must retain records substantiating ERC eligibility, including governmental orders for suspension or detailed gross receipts data demonstrating the required decline. These documents provide foundational proof for the ERC claim.

Businesses need to meticulously document all payroll records, including wages paid, hours worked, and health plan expenses in qualified wages. When PPP funds were received, clear records showing wage allocation between programs are imperative to avoid overlap. This might include detailed spreadsheets or internal accounting memos illustrating the non-duplication.

The statute of limitations for claiming the ERC generally aligns with the standard three-year period for amending tax returns. However, for the third and fourth quarters of 2021, an extended lookback period applies, allowing businesses to claim the credit until April 15, 2025. This extended period provides additional time to assess eligibility and file amended returns.

Businesses should retain all supporting documentation for at least three to five years from the amended return filing date, or longer if an audit or inquiry is ongoing. This includes PPP loan documents, forgiveness applications, and communications with lenders or the Small Business Administration related to PPP. Thorough record-keeping is crucial for navigating potential IRS reviews and demonstrating compliance.