How the PPP and ERC Interact
Many business owners believe that if the business received a PPP and it was forgiven, that business is not eligible for the ERC.
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Actually, under the CARES Act, that was a true statement - recipients of PPP forgiveness were not eligible for the ERC. However, under the COVID Relief Act, that rule changed, and the change was made retroactive to 2020 thus removing the prohibition against getting both the PPP and the ERC in the CARES Act.
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The Fine Print. However, there are restrictions placed on ERC eligibility for those businesses that received PPP forgiveness (note, the restriction is based on the amount FORGIVEN, not the amount of the PPP per se).
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Subtraction from ERC Qualifying Wages. The rule is this: Any qualifying wages used in a quarter for PPP forgiveness must be subtracted from qualifying wages in determining the ERC.
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Consider the following illustrative example:
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Business received a PPP loan on April 15, 2020 for $50,000. According to the PPP forgiveness rules, the business must show that at least 60% of the PPP loan was used for wages in the 25 week period following the funding of the PPP loan.
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When applying for forgiveness, the taxpayer presented payroll reports showing that $50,000 of wages were paid in May and June, 2020.
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Taxpayer paid a total amount of $75000 in wages in April, May and June, 2020; and now wants to make a claim for the ERC for Q2, 2020. It must first subtract the $50,000 used for PPP forgiveness, pro rata per employee over the period of May and June, 2020. The remaining $25,000 in wages paid may now be used to calculate the ERC for that quarter.
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