ERC and PPP Interaction

Technical topics regarding tax preparation.
#1
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For PPP loans of $150,000 or less, business used the PPP forgiveness application 3508S. The 3508S does not ask for amount of non-payroll expenses. If the business filled the full PPP loan amount as "Amount of Loan Spent on Payroll Costs," and if I have non-payroll expenses, can I reduce the amount of PPP used on payroll (not going below 60% of PPP loan) to maximize the amount of payroll I can use for ERC purposes. In addition, can I cherry pick employees that are over the annual $10,000 ERC amount to be paid with PPP funds (in the 24-week covered period) in order to maximize ERC?
 

#2
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Seems ok to me. In the end you have to be able to justify your position w/r/t cherry picking employees. I have seen PPP loans granting full forgiveness with only 61% of payroll costs claimed.
 

#3
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Terry, there's the rub. I have no justification to not count the payroll chronologically. I will have to forego cherry picking.

With regards to the 61%, a lot of clients submitted the forgiveness before the law changed. In IRS Notice 2021-20, question 49, examples 3 and 4 on pages 77-78, even if the full amount of payroll was reported, if you reported non-payroll expenses, the business was able to treat more of the payroll cost as qualified wages for ERC. Are 3508S filers which has no input for non-payroll expenses out of luck if they didn't adjust their payroll to 61% of the PPP forgiveness amount? I guess if I was conservative and didn't want any issues in the 5 year statute of limitation, I would just not push it.
 

#4
pdv86  
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No, if the business filling out the 3508S put the full amount on "Amount of Loan Spen on Payroll Costs", then you can't try to argue that there were additional non-payroll costs now. Also, no where does it say that you can not cherry pick wages for ERC.
 

#5
Wiles  
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I imagine the issue of not reporting the non-payroll costs on the PPP forgiveness application and the effect on ERC wages is significant.

Is there another thread on Tax Pro Talk that discusses this further?
 

#6
Wiles  
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Since the 2020 ERC is capped at $10K of wages per employee, can you pick and choose wages during the overlapping ERC/PPP period?

Let’s say the ERC & PPP period are as follows:
ERC period is 3/20/20 - 9/30/20
PPP period is 4/22/20 – 10/6/20.

Employee A has the following wages
3/20/20 – 4/21/20 $2,000
4/22/20 – 9/30/20 $15,000
10/1/20 - 10/6/20 $500

We will pull out $10,000 of these wages for ERC purposes. That leaves $7,500 for PPP purposes.

We do this for for each individual employee. Total up the PPP wages. If this total meets or exceeds the amount used on the PPP forgiveness application, then we have not lost any ERC wages to the PPP.
 

#7
Wiles  
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pdv86 wrote:No, if the business filling out the 3508S put the full amount on "Amount of Loan Spen on Payroll Costs", then you can't try to argue that there were additional non-payroll costs now.


Does anybody have any new info on this? Client received a $145K loan. Using the Form 3508S, they showed $145K of payroll costs. They also have non-payroll costs of $50K. But that form doesn't ask for non payroll costs. It only says "must include payroll costs equal to at least 60% of the Requested Loan Forgiveness Amount".
 

#8
TheGrog  
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According to the instructions you can use non-payroll costs, you just don't put them on the form. Which is extremely strange.

"Requested Loan Forgiveness Amount: Enter the total amount of your PPP loan that is eligible for loan forgiveness. This
amount is the “Amount of Loan Spent on Payroll Costs” plus any amount spent on eligible nonpayroll costs (described below)
minus any required reductions (described below), up to the principal amount of the PPP loan."

You are required to keep the records and calculations needed to support your numbers on the form, which includes the non-payroll costs as listed specifically in the S form instructions near the end.

I believe there was a notice or other guidance that said if you reported more wages than you needed for PPP forgiveness, then you can assume that the PPP used up wages in the most favorable possible configuration. How that interacts with this new S form that you don't report non-payroll costs on I don't know. If you have a record of and calculation for your non-payroll costs I would just assume you used up the minimum possible wages for PPP like before.

So far as I know you can choose dollar by dollar of wages for the ERC/PPP split. There is no need to take them chronologically, or even take an entire paycheck. That's what I did.
 


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