Can You Get ERC and PPP? Rules for Claiming Both

In early 2020, the global pandemic created significant challenges for businesses across the United States, impacting operations and raising concerns about employee retention. In response, the federal government introduced relief measures to support American businesses and their workforces. These programs provided financial lifelines, encouraging companies to maintain employment despite revenue losses.

Eligibility for ERC and PPP

The Employee Retention Credit (ERC) was established as a refundable tax credit to encourage businesses to keep employees on their payrolls. Businesses generally qualified if they experienced a significant decline in gross receipts or if their operations were fully or partially suspended due to a government order. For 2020, a significant decline meant gross receipts for a calendar quarter were less than 50% of gross receipts from the same quarter in 2019. For 2021, the threshold was reduced to a 20% decline compared to the same quarter in 2019, or the immediately preceding quarter.

The Paycheck Protection Program (PPP), conversely, offered forgivable loans primarily to help businesses cover payroll costs and other operating expenses. Eligibility extended broadly to small businesses, non-profit organizations, self-employed individuals, and independent contractors. Forgiveness required at least 60% of funds to be used for payroll costs, focusing on maintaining employment. This program provided capital to help businesses manage immediate financial needs and prevent widespread layoffs.

Navigating Concurrent Claims

Initially, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, businesses were prohibited from claiming both the Employee Retention Credit (ERC) and a Paycheck Protection Program (PPP) loan. This prevented “double-dipping” or receiving two forms of federal assistance for the same payroll expenses.

The Consolidated Appropriations Act, 2021 (CAA, 2021), signed into law in December 2020, retroactively removed this prohibition, allowing businesses to claim both the ERC and a PPP loan. This amendment provided flexibility, meaning businesses that had already received PPP loans could now assess their ERC eligibility.

Despite allowing concurrent claims, the CAA, 2021, introduced a non-duplication rule. This rule stipulates that the same wages cannot be used for both ERC calculations and PPP loan forgiveness. For instance, if payroll costs were submitted for PPP loan forgiveness, those wages are ineligible for calculating the ERC. This prevents businesses from receiving a tax credit and loan forgiveness for the exact same employee compensation.

Calculating Qualifying Wages

Applying the non-duplication rule requires careful tracking and strategic allocation of wages to maximize the benefits from both the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) loan forgiveness. Businesses must identify which wages were paid during their PPP covered period and how those wages were used for forgiveness. For instance, if a business spent more than the required 60% of its PPP loan on payroll costs, the excess payroll can often be allocated to the ERC, provided it meets ERC qualified wage criteria.

A common strategy involves first allocating the minimum 60% of the PPP loan to payroll costs for forgiveness, using non-payroll costs like rent or utilities for the remaining 40% if available. Any payroll costs beyond this 60% threshold, paid during the PPP covered period, can then be considered for ERC eligibility. This approach helps maximize PPP forgiveness while freeing up additional wages for the ERC claim. Qualified wages for ERC include certain wages and health plan expenses paid to employees during eligible periods.

Businesses must document all wage payments, distinguishing between those used for PPP forgiveness and those allocated to the ERC. The PPP covered period, typically 8 or 24 weeks, dictates the timeframe for wages considered for loan forgiveness. Wages paid outside this period, or wages within the period not used for PPP forgiveness, can be considered for the ERC if the employer meets the gross receipts or suspension of operations tests for relevant quarters. This detailed allocation is crucial for compliance and to optimize combined financial relief.

Impact on PPP Forgiveness and Tax Considerations

Allocating wages directly influences the amount of PPP loan forgiveness a business can achieve. Wages claimed for the ERC cannot be simultaneously counted towards the 60% payroll cost requirement for PPP loan forgiveness. If a business attributes too many wages to the ERC, it might fall short of the payroll threshold for full PPP forgiveness, potentially leaving a portion of the loan unforgiven and subject to repayment.

Regarding tax implications, the ERC itself is not considered taxable income. However, businesses must reduce their deductible wage expenses by the amount of the ERC received. For example, if a business received a $10,000 ERC, its wage expense deduction on its income tax return would be reduced by $10,000.

In contrast, PPP loan forgiveness is generally not considered taxable income for federal tax purposes. While federal tax treatment is clear, businesses should consult state-specific tax guidance as state tax laws regarding PPP loan forgiveness can vary.