Many businesses have managed to stay afloat during the pandemic, but that doesn't mean they are ineligible for the Employee Retention Credit (ERC). The ERC is a fully refundable tax credit that is filed against Form W-2 employment taxes. It is the government's way of rewarding companies for keeping their employees on the payroll, even if they were forced to not work for some time. However, an employer may not receive the employee retention credit if it receives a Paycheck Protection Program (PPP) loan authorized under the CARES Act.
An eligible employer receiving a PPP loan, regardless of the date of the loan, cannot apply for the employee retention credit. The Consolidated Allocation Act (CAA) has made it possible to obtain aid, but it has also created complexity for taxpayers who received a PPP loan and who qualified to receive the employee retention credit. The difference between the PPP and employee retention credits covers three main areas: the type of funding, the time at which the company receives funding, and the cost of the program. The CAA has also changed the applicable credit so that, in the second half of the year, it goes to Medicare instead of Social Security.
For purposes of determining eligibility for the employee retention credit, a tax-exempt employer's gross income includes gross income from all operations, not just from activities that constitute unrelated trades or businesses. In addition to the PPP, companies have the opportunity to take advantage of employee retention credits. According to the IRS website, “an employer that qualifies for the employee retention credit can apply for it even if they have received a small business interruption loan under the Paycheck Protection Program.”.