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Paycheck Protection Program (PPP 1 and 2) and the Employee Retention Credit (ERC)

by Megan Roberts, Extension educator, and C. Rob Holcomb, EA, Extension educator

The Consolidated Appropriations Act (CAA), 2021, passed December 27, 2020, updated the rules and processes for the Paycheck Protection Program (PPP) and Economic Retention Credit (ERC). Since the law's passage in late December, the Treasury Department, Internal Revenue Service, and Small Business Administration have issued further guidance of the programs. This post highlights some of the updates from early January 2021.

Although we have already addressed some of these program changes in a previous blog post, for clarity some points are repeated below. 

Recalculation of 1st draw PPP loans

A new provision (Division N, Title III, Section 313) in the CAA allows Schedule F filing sole proprietors, independent contractors, or self-employed individuals to retroactively recalculate their PPP 1st draw loans based on their 2019 gross income, instead of their 2019 net income. Schedule F filers are farmers and ranchers. However, if the PPP loan has already been forgiven in 2020, there is an exception to recalculating. In other words, farmers may not recalculate PPP 1st draw loans that are already forgiven. Farmers and ranchers meeting the new qualifications will also be allowed to use the gross income calculations for PPP 2nd draw loans issued in the future. Annualized maximums remain at $100,000 per employee (Division N, Title II, Section 344). The annualized maximum applies to the new gross income based farm and ranch owner's compensation calculations as well, with few exceptions. While non-farmers and non-ranchers may also be able to qualify for possible recalculations or first-time loans under specific circumstances, the recalculation based on gross versus net income is specific to Schedule F filers (i.e. only farmers and ranchers). The flow-chart below shows producers how to determine if they qualify for new 1st draw PPP funds, either via a first-time application or via a reapplication. The chart is adapted from materials from the National Association of Farm Business Analysis Specialists (NAFBAS) and used with their permission. If you qualify, you need to contact your lender. If you wish to begin preparing your application, you can download the PPP 1st draw borrower application form 2483 to see the information that will be requested from you when you contact your lender.

2nd draw PPP loans

In December, Congress funded an additional $284.45 billion (Division N, Title III, Section 323) for a second-round (or "2nd draw") of PPP for businesses with 300 employees or less with a final covered period date of March 31, 2021 (Division N, Title III, Section 343). Farmers and other small business owners that already received and appropriately spent down a first round of PPP in 2020 may be eligible for the second-round of PPP in 2021 under certain conditions. PPP 2nd draw loans are available to applicants only if they experienced "at least a 25 percent reduction in gross receipts in the first, second, third, [or fourth] quarter of 2020 relative to the same 2019 quarter " (Division N, Title III, Section 311). For most borrowers, the maximum loan amount of a 2nd draw PPP loan is 2.5x average monthly 2019 or 2020 payroll costs, up to $2 million. This is a familiar calculation for those that closely followed PPP last spring. For some borrowers, the maximum loan amount for a 2nd draw PPP Loan is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million. It would be unusual for farmers or ranchers to qualify for this higher 2nd draw amount as it only affects businesses in the North American Industry Classification System (NAICS) code 72, the accommodation and food services sector. An on-farm restaurant or on-farm food service establishment could be in this NAICS class.

The flow-chart chart below walks 2020 1st draw PPP recipients through determining if they qualify for a 2nd draw. The flow-chart also addresses the Employee Retention Credit (ERC), which we discuss more in the second half of this blog post. This second chart is also adapted from materials from the National Association of Farm Business Analysis Specialists (NAFBAS) and used with their permission.

If you qualify for a 2nd draw of PPP, you need to contact your lender. SBA will accept initial 2nd draw loan applications from certain community financial institutions (CFIs), "to promote access for smaller lenders and their customers." The application opens to all lenders on January 19. Prior to contacting your lender, you may wish to begin preemptively preparing a sample application to see the information that will be requested from you from your lender. You can download the PPP borrower 2nd draw application form 2483-SD here.

As higher commodity prices and substantial government payments have lessened economic concerns for some farmers, the PPP program may not be as applicable today on some farms as it was back in April, May and June of 2020. Applicants do have to certify on their SBA application form 2348-SD (or lender equivalent) that, "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant."

2020 PPP tax treatment 

Reminder, if you were a PPP borrower, the amount of your PPP loan (forgiven or reasonably expected to be forgiven) has been non-taxable gross income since PPP was created in the CARES Act last spring. However, the IRS stepped in this summer and said because income associated with PPP was tax-excluded they would not allow expenses associated with PPP to be deducted on your 2020 federal taxes. The new Dec 27 law usurps the IRS's old interpretation and very clearly states at the federal level PPP expenses are tax deductible (Division N, Title II, Section 276).  For sole proprietors without employees, owner's compensation is non-deductible to begin with, so the new law's treatment of PPP expenses should not affect your expense deductions for the owner's compensation portion of the loan. Furthermore, the new IRS tax treatment for 2020 PPP will also apply to 2021 PPP funds.

PPP forgiveness

PPP borrowers under $150,000 may use a new simplified forgiveness process, which requires less documentation (Division N, Title III, Section 307). Many farmers fall into this smaller PPP loan category and will be able to utilize simplified forgiveness. SBA has modified its existing forgiveness forms and updated information on the modification of covered periods from anywhere from 8 to 24 weeks. In particular, there is a new form for $150,000. 

January 20 Update: SBA released new forms on January 19, which are available here. Lenders may choose not to use these SBA forms and may offer a lender equivalent form instead. But looking at these new forms at least offers guidance as to what information your lender may request.

Employee Retention Credit (ERC)

Under the CARES Act (old legislation), ERC provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5000 per employee. The ERC may be claimed for wages paid after March 12, 2020, and before January 1, 2021. Eligible employers include private-sector businesses and tax-exempt organizations whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts (sometimes referred to as a significant decline in gross receipts), measured on a year over year basis [source RIA Checkpoint].

The recent COVID-19 relief law extends and expands the following CARES Act provisions for ERC:

  • The refundable payroll tax credit increased from 50% to 70% of qualified wages each quarter.
  • The limit on per employee credible wages increased from $10,000 for the year to $10,000 for each quarter.
  • The credit now includes wages paid or incurred from March 13, 2020, through June 30, 2021.
  • The safe harbor was created allowing employers to use prior quarter gross receipts to determine eligibility.
  • The required reduction in gross receipts changed from 50% to 20% of the same calendar quarter's receipts in the prior year.
  • The number of employees counted when determining the relevant qualified wage base increased from 100 to 500.
  • New employees who were not in existence for all or part of 2019 are now eligible to claim the credit 
The summary of the ERC provisions were sourced from materials of the National Association of Tax Professionals.

Retroactive ERC provisions

  • Reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee; and
  • Provides that employers who receive a paycheck protection program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds.
Both of these retroactive provisions are effective as of March 12, 2020.

Summary of ERC

Employers could qualify for the credit if their gross receipts for a calendar quarter are less than 80% of the same calendar quarter's gross receipts in calendar year 2019.

The recent COVID-19 relief law allows employers who received PPP loans (in 2019 or 2020) to qualify for the ERC as long as the PPP loan wages are not used to claim the ERC.

The ERC is claimed by reducing payroll withholding on Form 943, Form 941, Form 944, and/or Form 945. If the credit amount exceeds the amount of payroll deposit, an advance credit may be acquired by filing IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).  

This post is education in nature, and is not meant to be legal, financial or tax advice. Thank you to the National Association of Farm Business Analysis Specialists (NAFBAS) for allowing us to modify and share their PPP and ERC flow charts.

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