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Double Benefits: Claiming Both the ERC and Tax-Free PPP

First, say thanks to the Consolidated Appropriations Act, 2021 (CAA), enacted December 27, 2020. It opened the door (retroactively and going forward) for Paycheck Protection Program (PPP) participants to also claim the employee retention credit (ERC).

Reminder. Tax credits are the best. They usually reduce taxes dollar-for-dollar.

(The ERC is not quite as good as the usual tax credit because you increase taxable income by the amount of the credit. But it’s still good—very good.)

The CARES Act, enacted on March 27, 2020, created the PPP money, but it prohibited you from getting both PPP money and tax credits from the ERC; you had to choose one benefit or the other. Now, thanks to the new December law, you can have both tax-free PPP money and tax credits from the ERC.

And perhaps the best news of all comes from the IRS in its recently released, business-friendly guidance on how the rules work when you want to claim both PPP and ERC benefits.

How the Law Changed

The CAA made four important changes retroactive to 2020:

  1. You may now qualify (yes, retroactively) to claim the ERC for 2020 wages even though you had a 2020 PPP loan.
  2. You may not claim the ERC on PPP wages used for PPP loan forgiveness.
  3. You can elect not to claim the ERC, so as to increase your tax-free PPP monies.
  4. If your lender denies your PPP loan forgiveness, you can claim the ERC for the qualified wages even when you made the election not to claim the ERC for those wages.

Congress made the changes retroactive to March 13, 2020, allowing you to now amend your 2020 payroll tax returns to claim the employee tax credits for which you are eligible.

You likely hadn’t thought of amending payroll tax returns, because it’s not often done. But you have the three-year statute of limitations for amending payroll taxes just as you have it for your income tax returns.