Like so many of the changes brought on by the COVID-19 pandemic, navigating financial relief packages has become a long-term challenge. From the original versions of the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) to the provisions established by the Consolidated Appropriations Act (CAA), relief funding alone can be complex. When you add other variables like Research and Development (R&D) tax credits into the mix, the situation only gets more complicated.
At National Tax Group, our tax experts specialize in untangling tricky tax benefits. We have the answers to all of your questions about the interplay between these programs, and we’re always happy to help you maximize your savings.
Can I Claim the Employee Retention Credit (ERC) if I Received a Paycheck Protection Program (PPP) Loan?
The Employee Retention Credit and the Paycheck Protection Program were both introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC is a refundable tax credit available to employers negatively impacted by the COVID-19 pandemic that continued to pay their employees. Qualified employers can claim a tax credit for 70% of eligible wages.
PPP loans provided a broader form of financial relief, encompassing payroll costs, rent, interest, and utilities. As long as the employer maintained employee counts and wages, they could apply for PPP loan forgiveness.
Initially, under the CARES Act, employers who had already received a PPP loan were not eligible for the ERC. The Consolidated Appropriations Act (CAA) changed that policy in December 2020, stating that “an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP).” However, employers cannot claim the ERC on any wages that already count towards payroll costs for PPP loan forgiveness.
Read more about claiming payroll costs for the ERC and PPP loan forgiveness here.
Do PPP Loans Affect R&D Tax Credits?
The R&D Tax Credit incentivizes businesses to push boundaries and perform research and development projects to further innovation. The credit offers reimbursement for non-deductible expenses utilized during research, and in many cases, employee wages make up a significant portion of those expenses.
Under the CARES Act, forgiven PPP loans were exempt from taxable income — or, in other words, they were deductible. This left businesses that relied on PPP funds for employee wages ineligible for R&D Tax Credits. However, the second round of PPP funding altered the wording to fix the issue, and forgiven PPP loans do not affect eligibility for R&D Tax Credits.
Can I Claim Both the Employee Retention Credit and R&D Credits?
The CAA specifies that employee wages used to claim the ERC cannot be used to claim the R&D Tax Credit. Like the relationship between wages used for PPP forgiveness and for the ERC, employers can apply some wages to each credit, but they cannot use the same employee’s wages for both credits.
The CAA also adjusted the qualifications for being considered a “large employer.” Large employers can only apply the ERC to wages paid to employees who were not providing services during the pandemic; small employers can apply the ERC to all employee wages, whether they were working or not. Previously, companies with 100 employees were considered large employers, but the CAA raised the threshold to 500 employees, reclassifying many companies from large to small. Due to this change, more employees actively working on research and development activities could also qualify for the ERC.
Eligible taxpayers looking to claim both the ERC and R&D Tax Credits should examine their qualified wages for each credit to maximize their savings.
Consult with a National Tax Expert
If you are eligible for both the ERC and R&D Tax Credits, a specialized tax expert can help you analyze employee wages and decide which to apply towards each credit. National Tax Group has over 20 combined years of experience maximizing our clients’ savings through R&D Tax Credits, cost segregation studies, 179d deductions, and other underutilized areas of the tax code. Contact us today for a free assessment!