When COVID-19 relief funding became available, businesses were quick to hop on the much-needed lifelines. For businesses who have taken either the Employee Retention Credit (ERC) or received a Paycheck Protection Program (PPP) loan (or both), and possibly a Research and Experimentation (R&E) tax credit the route to optimization is much more complex than when any of the incentives are utilized alone.

Each opportunity also has a unique set of rules to consider. The rules in place prevent taxpayers from “double-dipping” by claiming multiple incentives with the same expenses. The PPP and ERC programs are not allowed to use the same dollars. Additionally, employers who calculated and claimed the ERC for 2021 cannot then claim an R&D tax credit for the same expenses (though they can in 2020).

While many states elected to follow the federal government for PPP loan deductibility, California has specific guidelines. Businesses in California need to be aware of all the opportunities for savings as there are additional restrictions related to PPP loan deductibility. California employers who are not eligible to deduct the PPP loan must exclude those payments from employee compensation expenses.

Balancing the allocation of your incentives is a complicated process, and each program has different rules, the highlights are outlined below:

Paycheck Protection Program Employee Retention Credit Research and Development Tax Credit
Expense Categories
  • Gross Wages
  • Employer side of Health Insurance Other costs – up to 40% of total loan value
  • Gross Wages
  • Employer side of Health Insurance
  • Restrictions based on company size
  • Qualified Taxable Wages
  • Qualified Supplies
  • Qualified Outside Contractor Costs (at 65%)
Program Value
  • 100% forgiveness possible
  • 2020: 50% up to $10,000 per employee for the year
  • 2021: 70% up to $10,000 per quarter per employee in Q1-Q3
  • Approximately 6-12% federal credit
  • Additional state credits (California is often nearly as much as the federal credit)

Understanding the different programs is key to maximizing the total return and depends significantly on each company’s facts and circumstances.

One Sensiba San Filippo client, while able to generate enough expenses in the 8-week PPP2 covered period to be eligible for full forgiveness, was advised to use a 24-week covered period instead. The net result was that significantly more employees were able to use the maximum allowed wages for the ERC, resulting in just over $100,000 in increased ERC compared to the 8-week period.

Another was a non-calendar year client who, during Q1 of 2021, was eligible for all three opportunities– a PPP2 loan, an ERC credit, and R&E credits for tax year 2020.  Understanding the interactions between the different programs enabled the SSF team to take the full ERC, ensure PPP2 forgiveness, and minimize the impact to the R&E Credit.  Managing the order and priority for each program according to the highest and best use of the dollars mitigated the net impact of the competing incentives and maximized the overall benefit to the client.

Many payroll providers allow businesses to use their services to file for the ERC and some also handle basic R&E Credit calculations. However, they often don’t have visibility to all the information needed to maximize the savings and ensure proper compliance with all the programs. We recommend working with a professional to secure the largest savings and help ensure compliance in this continually evolving area.

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