Thread by @danchodan

How to maximize ERC and PPP interplay: A thread

After spending far too much time in this area, I wanted to share some ideas for maximizing the employee retention credit. Will try to include everything from the obvious to the obscure.

#TaxTwitter

1)Get the payroll data by employee by pay.

The key to getting max benefits is in slicing and dicing payroll. We can pick and choose which wages are claimed for either ERC or PPP specifically. This could mean anything even down to dividing a single paycheck.

2)Be comfortable in excel or find someone who is.

Until @JStaatsCPA automates ERC for us, we are stuck figuring out this mess in excel. If you have never used Vlookup, Iferror, or If/then formulas, it’s probably best to hand this off to a team member or outsource entirely.

3)Summarize your data into segments.

ERC must be reported quarterly, but the PPP 24 week covered periods will not align neatly with quarters. So segments must be quarterly but also further divided into pre and post PPP.

Here are example segments for a restaurant shut down on 3/20, receiving PPP on 4/23, and with full ERC eligibility in 2020:

3/20-3/31 Q1 ERC
4/1-4/22 Q2 ERC
4/23-6/30 Q2 ERC and PPP overlap
7/1-9/30 Q3 ERC and PPP overlap
10/1-10/7 Q4 ERC and PPP overlap
10/8-12/31 Q4 ERC

To maximize ERC, “work from the outside in” by first using wages outside the PPP covered period. In our example this means using 3/20-4/22 and 10/8-12/31 wages first for ERC.

For anyone would doesn’t hit the $10k ERC wage cap on “the outside”, go into the PPP period wages until the cap is reached for that employee.

Finally, compare your remaining PPP wages to your PPP loan (at least 60% must be wages). If you have plenty of wages, congratulations! – both PPP and ERC are maximized. If you are short of the loan or even short of 60% of the loan, we have more work to do.

4)Prioritize PPP over ERC.

I am a firm believer in optimizing by calculating the max ERC first. However, if we run out of wages for both, the ERC needs to be the first to go. Why? ERC is worth only 50% or 70% of wages. PPP is worth 100% of wages plus nonpayroll costs related.

But before we back down our maximum ERC to fully utilize PPP forgiveness, let’s talk more about maximizing our PPP.

5)Use as much PPP nonpayroll costs as possible.

Wages will often be in short supply when calculating PPP/ERC interplay. So we must use nonpayroll to save wages when we can. We can get PPP forgiveness using up to 40% of the loan for nonpayroll costs.

Here is list of nonpayroll costs from the forgiveness application:

It’s worth noting that “gas used in a business vehicle” was specifically allowed in an IFR as a utility though not noted that specifically on the application.

Also many include their real estate rent but forget their equipment or vehicle lease payments.

Dig deep for nonpayroll costs. Most practitioners stopped worrying about them when PPP was extended to a 24 week period, but now with the ERC interplay each dollar of nonpayroll cost found may be additional cash returned to clients.

6)Use payroll costs for PPP that don’t overlap with ERC.

The definition of payroll costs are not the same. We benefit by first using payroll for PPP that we can’t use for ERC. This will include employer paid retirement, state/local taxes, group life/disability insurance.

Additionally >50% owners and relatives are allowed for PPP forgiveness (subject to limits), but are not allowed for ERC. So be sure to use them for PPP in your interplay calculations.

I know @TGorcz will say there is still a chance that the IRS bails us out to allow ERC for

>50% owners (to which I’ll begrudgingly agree however unlikely that may be). But until we get a bailout from the IRS, we are stuck applying “directly and indirectly” as defined by 267(c) resulting is disallowance of ERC for >50% owners in the meantime. This is okay. This helps

our interplay calculations anyway in many cases. And if we do receive a bailout from the IRS later and there are excess owner wages left: “Congratulations, client. A new IRS rules makes you eligible for more ERC money. Happy to file that for you.”

7)Don’t forget about “paid or incurred.”

Do you remember when we were doing ridiculous planning with clients trying to figure out how to spend a PPP loan based on 2.5 months of payroll within an 8-week covered period when they weren’t operating? Those were the good old days.

Back then timing was everything and we really hung on every word of PPP guidance as it could make or break our plans. One of the key aspects was “paid or incurred.” What did it mean? When the IFRs finally came, we found that this language meant costs were eligible for

forgiveness if they were 1. Paid during the covered period or 2. Incurred during the covered period and paid at the next regular payroll/billing date.

How does “paid or incurred” help with your ERC/PPP interplay calcs? If we can get additional forgiveness by including costs

outside of the covered period, we can free up additional wages to use for ERC. Perhaps your 40% nonpayroll bucket isn’t full yet – maybe the rent check incurred in September but paid in October can be used? Perhaps you don’t have ERC eligibility in the 4th quarter –

then go ahead to use the Oct 9th paydate after the covered period for PPP forgiveness as long as it was incurred in the covered period.

8)Don’t forget about “owner’s compensation replacement” for PPP forgiveness.

You can’t get ERC for partners or sole proprietors (No one will fight me on that part for owners at least 😊 ). However partners and sole proprietors do receive benefit for their “wages” in

PPP forgiveness based on their K-1 or Sch C/F. This can be easily forgotten in interplay calculations as these owners do not show up in the payroll data. Don’t miss them.

9)Use health insurance.

We don’t talk about it much. It can be pain to calculate. But we have to use health insurance if we hope to maximize both ERC and PPP – especially in 2021. Perhaps your scenarios are capped out at $10k per employee already before health costs or those

who aren’t at the cap also don’t participate in the health plan. Okay. Yes, in 2020 it’s likely that many scenarios won’t need to consider health costs, but we shouldn’t ignore it completely. And for 2021 with $10k cap quarterly instead of annually, using health insurance is a

must. Remember that health expenses include medical, dental, vision, HRA, and health FSA.

So how does health insurance help with ERC and PPP interplay?

First- it’s the same benefit as item 3) above when looking at ERC eligibility segments that do not overlap with PPP. Use health insurance to increase employees toward the $10k cap outside of the PPP window first to preserve the most wages possible for PPP.

Second- health insurance inside of the PPP covered period can be used for forgiveness or ERC giving flexibility.

Third- health insurance for the ERC can be multiple numbers. This is a frustration and an opportunity.

The IRS allows health insurance expenses to be allocated based on either:

1.COBRA premiums
2.One average rate for all employees
3.Two average rates for either self-only coverage or other coverage
4.Any reasonable method

A savvy accountant may consider which allocation approach is the best result or may just say “Enough is enough, Dan! This isn’t worth it!” That’s okay. I won’t be offended (this isn’t 267c here). At times we do need to decide whether or not the ERC juice is worth the squeeze.

But please don’t ignore health entirely.

10)Utilize FFCRA wages

An interplay conversation isn’t complete without mentioning that wages for the FFCRA credits also cannot be used for either PPP or ERC. Be sure not to miss FFCRA in this process. Look for it on the 941s you are amending.

If FFCRA isn’t there, ask if it should be. If we are amending 941s anyway, now is a great time to also amend to claim any missed FFCRA benefits. It amazes me how many businesses are still completely unaware of this program and are due significant refunds.

11)Watch out for other programs which cannot overlap wages for ERC.

For 2020 and 2021:
Work Opportunity Tax Credit (51)
Paid Family and Medical Leave Credit (45S)
Shuttered Venue Operators Grant
Restaurant Revitalization Fund

For 2021 only:
Research and Development Tax Credit (41)
Indian employment credit (45A)
Active duty member wage credit (45P)
Empowerment Zone Employment Credit (1396)

I hope this has been useful to someone. Thanks for reading.

What other interplay ideas have I missed? Let me know and I’ll add them to the thread.

ERC and PPP interplay continued:

It was great to hear from many of you who are working through these same issues. Sounds like #TaxTwitter is on the right track.

Here are some additional items which where shared:

12) Employees exempt from Medicare tax don't qualify for ERC. Use them for PPP instead. Thanks for the reminder, @CpaIrina

This includes amish/other plain sect 4029 exempt wages. Also includes minister pay which is not subject to FICA through their unique dual status.

13) @jckristoff gave a good tip to remove any FFCRA wages first before dicing wages up further. This is a great point as these wages are excluded from both ERC and PPP. Best to do it up front.

14) @adammarkowitzEA highlighted that we shouldn't dig up all the non-payroll PPP expenses first. Many companies can max both programs with wages only (though this is harder in 2021 admittedly). So best to do wage segmentation work first (my steps 1-4 before step 5 nonpayroll).

15) It is worth noting that your client may also have state, local, or other relief grant money which may be utilizing some of the same costs as ERC and PPP. We need to discuss all of their relief money in this context.

@amiekcpa wrote a great article on maximizing for Checkpoint.

https://twitter.com/amiekcpa/status/1397609303750680576

She outlines a different order of steps to max the interplay. It has been interesting to hear how some very smart people on #TaxTwitter have taken different paths to the same result.

Reading Amie's article also gave me a new idea which I'm sure to try in 2021. PPP payroll costs include "cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips)"

16) ERC wages must be Medicare wages which includes reported tips, but PPP wages seem to be able to also include unreported tips based on "a reasonable, good-faith employer estimate."

Develop an estimate of unreported tips for PPP forgiveness to preserve more ERC wages.

I can't say that I'm 100% comfortable with this idea. Would only use it as a last resort. But at a 70% benefit for an unreported tip estimate to generate more ERC wages effectively, I'd be happy to try applying for PPP forgiveness with it first before finishing the ERC 941Xs.

Thank to everyone for the good feedback and ideas.