The AICPA has sent a comment letter to the IRS regarding how to deal with the issue of claiming the 2020 version of the employee retention credit when payroll costs have been reported on a Paycheck Protection Program loan forgiveness application.[1]

Prior to the passage of the Taxpayer Certainty and Disaster Relief Act (TCDRA) of 2020, part of the Consolidated Appropriations Act, 2021, taxpayers who had received a Paycheck Protection Program loan were not eligible to claim the Employee Retention Credit enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  However, the December 27, 2020 law removed that restriction, providing instead that such a credit would not be available to be claimed for wages that were used to obtain forgiveness for a Paycheck Protection Program (PPP) loan.

As the AICPA letter describes the situation:

The CARES Act provided employers with the option to benefit from one of two mutually exclusive incentives, a Paycheck Protection Program (PPP) loan or an employee retention credit (ERC), designed to allow employers to retain employees during the pandemic. Section 206 of the TCDRA allows employers who received a PPP loan to retroactively claim the ERC for wages paid after March 12, 2020, but not for the wages used to obtain PPP loan forgiveness.[2]

Borrowers who applied for forgiveness prior to the enactment of the TCDRA were not aware that there would be an option to claim the Employee Retention Credit or that such a claim would be conditioned on not having used such wages to obtain forgiveness of a PPP loan.  As the AICPA letter notes:

It is unclear how the reporting of wages as payroll costs on a previously filed PPP loan forgiveness application affects an employer’s ability to claim the ERC for wages that were included on a loan forgiveness application but did not affect the amount of loan forgiveness.[3]

An applicant could reasonably have concluded that, with a 24-week covered period over which to spend funds that were based on 2.5 months of average 2019 payroll, that they could simply report wages on the application form.  Similarly, a borrower might have reported all wages and related expenses on the forgiveness application form, assuming that this would allow full forgiveness even if the bank or SBA decided a portion of their expenses did not qualify for forgiveness.

Now that the rules are changed, are those borrowers simply out of luck?  The AICPA letter recommends that the IRS adopt guidance to avoid that result:

The AICPA recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.[4]

The AICPA analysis notes that borrowers had no idea listing excess wages on the application would end up having a potentially negative impact on qualification for this tax credit, since they were not at all eligible for this credit under the law in place when they applied for forgiveness:

To be eligible for PPP loan forgiveness, an employer must incur or pay payroll, rent, utilities and interest amounts during the covered period or alternative covered period. On loan forgiveness applications, many employers reported only payroll costs (and not rent, utilities, and interest), because the payroll costs generally exceeded the loan amounts. Because employers did not have the option to claim the ERC at the time many loan forgiveness applications were filed, they were not concerned about reporting wages in excess of those needed for loan forgiveness.[5]

The AICPA letter also points out that the IRS had allowed those who were qualified to claim the ERC to opt out and then later change their mind, but that this guidance doesn’t address the PPP issue:

Qualified wages for ERC purposes are amounts paid by an eligible employer up to $10,000 per employee, unless the employer elects out of the provision. IRS frequently asked question (FAQ) #93 states that an eligible employer can elect not to apply the ERC for any calendar quarter by not claiming the credit on the employer's employment tax return. IRS FAQ # 94 states that the election can be changed by amending a quarterly payroll tax filing and that the employer can claim a credit for a subsequent quarter even though no credit was claimed in the previous quarter. The FAQs do not address the election process when payroll costs have been reported on a PPP loan forgiveness application.[6]

The AICPA letter includes two examples of applying their recommendation to specific facts.  The first example deals with a simple case where the borrower simply reported more wages on the forgiveness application than were required to obtain forgiveness, likely because there appeared to be no reason not to.

Example 1

Employer X received a $1,000,000 PPP loan. On its PPP loan forgiveness application Employer X reported $1,500,000 of payroll costs for the covered period April 15, 2020 to September 29, 2020. The entire loan was forgiven.

Employer X should be permitted to claim the ERC for qualified wages paid from March 13, 2020 through December 31, 2020, including qualified wages related to the $500,000 of wages reported on the loan forgiveness application in excess of the $1,000,000 of wages necessary for forgiveness, without jeopardizing the validity of the PPP loan forgiveness application.[7]

The second example looks at the case where the borrower, in addition to reporting more payroll costs than would have been necessary to obtain forgiveness, also failed to include other, non-payroll costs that would have reduced the amount of payroll costs necessary for forgiveness.

Example 2

Employer X received a $1,000,000 PPP loan. On its PPP loan forgiveness application, Employer X reported $1,500,000 of payroll costs for the covered period April 15, 2020 to September 29, 2020. In addition, Employer X incurred $100,000 of rent expenses during the covered period that were not reported on the loan forgiveness application as they were not necessary for loan forgiveness. The entire loan was forgiven.

Employer X should be permitted to claim the ERC for qualified wages paid March 13, 2020 through December 31, 2020, including up to $600,000 ($1,500,000 of wages included on the loan forgiveness application + $100,000 of rent expenses not reported on the application - $1,000,000 loan) of payroll costs reported on the loan forgiveness application, without jeopardizing the validity of the PPP loan forgiveness application.[8]

[1] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/56175896-aicpa-comments-erc-ppp-loans.pdf (retrieved January 29, 2021)

[2] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p. 1

[3] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p. 2

[4] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p.2

[5] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p. 2

[6] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p. 2

[7] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, pp. 2-3

[8] AICPA Letter to David J. Kautter, Michael W. Faulkender and Charles P. Rettig, “Re: Employee Retention Credit – Sections 206 of the Taxpayer Certainty and Disaster Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021),” January 15, 2021, p. 3