The COVID-19 pandemic has caused many businesses to struggle, and the federal government has stepped in to help. One way they have done this is by offering loans that are 100% guaranteed to companies that keep their employees on the payroll. These loans are fully forgivable as long as the funds are used for payroll expenses, commercial mortgage payments, rent, or utilities. However, an employer may not receive the Employee Retention Credit (ERC) if they receive a Paycheck Protection Program (PPP) loan authorized under the CARES Act.
This means that an eligible employer who receives a PPP loan, regardless of the date of the loan, cannot apply for the ERC. Additionally, an employer that is considered a single employer under the aggregation rules cannot receive the ERC if any member of the employer's aggregate group receives a PPP loan. An employer receiving a PPP loan may not receive an ERC, regardless of if and when the loan is forgiven. An acquiring employer that purchases the assets of a target employer that has received a PPP loan will not be considered to have received a PPP loan by virtue of the acquisition of assets, provided that the acquiring employer does not assume the obligations of the target employer under the PPP loan.
In this case, the acquiring employer may apply for the ERC after the closing date of the transaction if they meet all requirements to apply for it. In addition, any ERC requested by the acquiring employer for qualified wages paid before the closing date will not be subject to recovery under section 2301 (l) () (of the CARES Act). Employers with more than 100 full-time employees can only use the qualified salaries of employees who do not provide services due to the suspension or decline of business activity. The ERC is a refundable credit that companies can request on qualifying salaries, including certain health insurance costs, paid to employees.
Companies can no longer pay their salaries to apply for the employee retention tax credit, but they have until 2024 and, in some cases, 2025, to analyze their payroll during the pandemic and apply for the credit retroactively by filing an amended tax return. The notice includes guidance on how employers who received a PPP loan can retroactively apply for the ERC. This law increased the employee limit to 500 to determine what salaries are applicable to the credit. Employers with 100 or fewer full-time employees can use all salaries of employees who work, as well as any paid time that they are not working, with the exception of paid vacation provided under the Families First Coronavirus Response Act. Also, remember that if a customer has applied for a PPP loan and will be forgiven for it, they may now be eligible for the retention credit for employees with certain salaries. The IRS has barriers in place to prevent wage increases from being factored into the credit once an employer is eligible for it.
An eligible employer cannot apply for both an ERC and a Work Opportunity Tax Credit (WOTC) for the same employee for the same period of time. While the ERC program has officially expired, this does not affect a company's ability to apply for it retroactively. The following rules apply to determine if an employer (acquiring employer) that purchases assets and liabilities of an entity (target employer) is eligible for it:
- If, as part of acquisition of assets and liabilities of target employer, acquiring employer assumes obligations of target employer under PPP loan after closing date of transaction, acquiring employer will generally not be considered to have received PPP loan provided that acquiring employer has not received PPP loan before, on or after closing date.
- Salaries that can be considered qualifying wages after closing date will be limited; specifically wages paid by acquiring employer after closing date to any person who was employed by target employer on closing date will not be considered qualifying wages.
- Subject to this limitation, acquiring employer may request ERC for qualified wages paid on and after closing date provided that they meet requirements to apply for it.