Important ERTC Considerations Prior to Filing 2020 Tax Returns

The Internal Revenue Service (IRS) released Notice 2021-20 incorporating detailed guidance for employers claiming the Employee Retention Tax Credit (ERTC) for any quarters in 2020. Additionally, this guidance includes examples of various scenarios in determining eligible wages where a taxpayer may have already filed for PPP forgiveness.


Potential Benefits of the ERTC


At a high-level, the maximum benefit a business could receive from the ERTC within 2020 is:


Number of employees x $5,000


For 2021, that maximum potentially increases to:


Number of employees x $14,000


We have evaluated many of our clients’ situations under both the 50% reduction in gross revenue, as well as, the full or partial shutdown of operations. Here are a few of those results:


Client 1: Privately-held business with 65 employees, mostly part-time, filing under the 50% decline in gross receipts method. Their 2020 ERTC amounted to over $125,000, on top of expected full forgiveness of their $100,000+ PPP loan.


Client 2: Hospitality business with over 500 employees, mostly part-time, filing under the full or partial shutdown operations method. Their 2020 ERTC amounted to $1M, on top of expected full forgiveness of their $2M PPP loan.


Client 3: Doctor’s office with 30 employees, filing under the full or partial shutdown of operations method, covering only 8 weeks early in the pandemic. Their 2020 ERTC amounted to nearly $20,000, on top of expected full forgiveness of their $200,000+ PPP loan.


Client 4: Contractor with 20 employees, mostly full-time employees, filing under the 50% decline in gross receipts method. Their 2020 ERTC amounted to $100,000, on top of full forgiveness on their already SBA-forgiven PPP loan of $200,000+.


Impact to 2020 Tax Returns


For accrual-based employers who have claimed, or expect to claim, an ERTC for any portion of calendar year 2020, the taxpayer should treat such amounts as a reduction of salaries and wages expense on their respective tax return in the year the compensation and/or insurance expenses were incurred. For those employers expecting to claim this credit, while the Form 941-X does not necessarily need to be filed with the IRS prior to the filing of your tax return, incorporating the necessary tax adjustment for the credit amount will remove the need to file amended tax returns once such Form 941-X filings are made and ERTC benefits are received.


For cash-based employers, the benefit of the ERTC is recorded in the year in which the benefit is received. Therefore, no adjustment is necessary for 2020 tax return to the extent a refund check was not received in 2020.


Additionally, for those taxpayers who utilize wages in any other tax calculation (e.g. R&D credit, Sec. 199A, “Tips Credit”, etc.), such a reduction in salaries and wages from the ERTC could negatively affect these supplemental calculations. While we believe the ERTC remains to provide added benefit over the detriment to these other calculations, your business’s facts and circumstances will dictate that determination.


Incorporating the ERTC with PPP Loan Forgiveness


As a principle rule, wages, salaries, and health care expenses may only be allocated to a single program, whether that is the ERTC, PPP forgiveness, or any other calculation where the employer is receiving a benefit. Therefore, it is important to segment or bucket these expenses into the appropriate program to maximize the available benefits to the business.


Businesses who have filed for PPP forgiveness


The SBA is not permitting borrowers to amend their PPP forgiveness applications if the borrower has already received a determination letter from the SBA regarding their PPP forgiveness. We believe the only opportunity for borrowers to make changes to such applications is if they are pushed back from either their lender or the SBA for corrective action.


As such, the IRS has indicated that the wages “trapped” under PPP forgiveness, and therefore not available for ERTC consideration, is lesser of:

  1. Their PPP loan amount

  2. Qualified wages claimed on Schedule A

Example 1:

Employer A received a PPP loan of $200,000. Employer A is an eligible employer and paid $250,000 of qualified wages that would qualify for the employee retention credit during the second and third quarters of 2020. Employer A also paid other eligible expenses of $70,000. Employer A submitted a PPP Loan Forgiveness Application and reported the $200,000 of qualified wages as payroll costs in support of forgiveness of the entire PPP loan, but did not report the other eligible expenses of $70,000. Employer A received a decision under section 7A(g) of the Small Business Act in the first quarter of 2021 for forgiveness of the entire PPP loan amount of $200,000.


Employer A is deemed to have made an election not to take into account $200,000 of qualified wages for purposes of the employee retention credit, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven. Employer A is deemed not to have made an election of the additional $50,000 of qualified wages above and beyond their PPP loan amount. Although Employer A could have reported $70,000 of eligible expenses (other than payroll costs) and $130,000 of payroll costs, Employer A reported $250,000 of qualified wages as payroll costs on the PPP Loan Forgiveness Application. As a result, only $50,000 of those qualified wages reported as payroll costs may be treated as qualified wages for purposes of the employee retention credit. Employer A cannot reduce the deemed election by the amount of the other eligible expenses that it could have reported on its PPP Loan Forgiveness Application.


Example 2:

Employer B received a PPP loan of $200,000. Employer B is an eligible employer and paid $150,000 of qualified wages that would qualify for the employee retention credit during the second and third quarters of 2020. In addition to the qualified wages, Employer B had $100,000 of other payroll costs that are not qualified wages (e.g. employer retirement benefit expenses) and $70,000 of other eligible non-payroll expenses. In order to receive forgiveness of the PPP loan in its entirety, Employer B was required, under the SBA rules, to report $200,000 of payroll costs and other eligible expenses (and a minimum of $120,000 of payroll costs).


Employer B submitted a PPP Loan Forgiveness Application and reported $130,000 of payroll costs and $70,000 of other eligible expenses, in support of forgiveness of the entire PPP loan. Employer B can demonstrate that the payroll costs reported on the PPP Loan Forgiveness Application consist of $100,000 of payroll costs that are not qualified wages and $30,000 of payroll costs that are qualified wages. Employer B received a decision under section 7A(g) of the Small Business Act in the first quarter of 2021 for forgiveness of the entire PPP loan amount of $200,000.


Employer B is deemed to have made an election not to take into account $30,000 of qualified wages for purposes of the employee retention credit, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven. It may not treat that amount as qualified wages for purposes of the employee retention credit. Employer B is not deemed to have made an election with respect to the $120,000 of qualified wages that are not included in the payroll costs reported on the PPP Loan Forgiveness Application. Accordingly, Employer B may take into account the $120,000 of qualified wages ($150,000 of qualified wages paid minus $30,000 of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application) for purposes of the employee retention credit.


Businesses who have NOT filed for PPP forgiveness


Businesses that have not filed for PPP forgiveness have the opportunity to minimize the payroll claimed on their PPP forgiveness applications, which is to be “trapped” under the deemed election. Candidly, this does create more work on the PPP side with additional documentation for rent, mortgage interest, utilities, etc. potentially being sent to the lender/SBA, but in doing so, the business maximizes the potential cash benefit from the ERTC, as expressed in Example 2 above.


Therefore, we implore you to consider the ERTC prior to filing your PPP forgiveness application.


To the extent there is no potential benefit under the ERTC, you could then submit your PPP application as intended with the assurance that all potential benefits were vetted.

At Cassady Schiller, we are prepared to help you understand how these changes can apply to your specific situation. Accordingly, please reach out to us to see how we can help you take full advantage of this program for either 2020 or 2021.


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4555 Lake Forest Drive, Suite 400

Cincinnati, OH 45242

(513) 483-6699 /

(800) 378-8606

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