Q&A #48 – Are nonprofits that received PPP funds eligible to receive employee retention credits?
Question: My nonprofit has received first and second draw PPP loans, but has not yet applied for PPP loan forgiveness. Last year when we first received the PPP loan, it was my understanding that we could not also receive employee retention tax credits. I have since heard that we may now be eligible to receive both. Is this true?
Answer: The Consolidated Appropriations Act of 2021 (P.L. 116-260), which was signed into law on December 27, 2020, included a significant expansion of the employee retention credit (ERC), so it is true that your organization may indeed be eligible to receive both Paycheck Protection Program (PPP) loan forgiveness and ERC. However, there are important limits nonprofits that received PPP funds must be aware of.
When the CARES Act was originally passed in March 2020, organizations did not qualify for the ERC if they received a PPP loan. Most organizations opted for PPP funds if they could obtain them from a participating lender, as the PPP provided a more substantial benefit.
The Consolidated Appropriations Act retroactively removed this restriction, loosened the criteria for eligibility, and extended the ERC through June 30, 2021, albeit with an important caveat: the ERC does not apply to wages that are counted for purposes of PPP loan forgiveness.
A good summary of the rules can be found here. Notably, employers must be able to show that their business has: (1) been fully or partially suspended due to a government order relating to COVID-19; or (2) experienced a significant decline in gross receipts compared to the same quarter in 2019 (for 2021, this decline must be at least 20%, a less stringent criteria than the 50% decline required for 2020).
The IRS has indicated that qualifying employers may amend their Forms 941 to claim a refund based on the ERC for 2020, although the more generous credit applies to wages paid from January 1, 2021 through June 30, 2021 (in which qualifying employers may receive up to a maximum of $7,000 per employee per quarter, up from the maximum of $5,000 per employee for the entire period from March 13, 2020 through December 31, 2020).
Planning Tip – Maximizing the benefits of the PPP and ERC programs entails a complicated balancing act. Organizations must satisfy the minimum 60% of PPP funds applied to payroll costs during the covered period in order to receive full PPP loan forgiveness, but should try not to surpass this amount so as to preserve the possibility of receiving the ERC for payroll costs above this threshold. Organizations should seek the advice of their CPA and other payroll tax service professionals on this issue as soon as possible, especially with respect to the higher ERC benefits that apply in 2021.
Note that there is currently some question about the extent to which organizations can use the ERC if they have previously filed a PPP loan forgiveness application that reported more payroll costs than were necessary to receive PPP loan forgiveness. Watch out for future IRS guidance on this issue.
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