Filed under: Tax Compliance & Planning
With vaccination rates going up and COVID restrictions being lifted, many employers are now looking at the gross receipts test to remain eligible for the Employee Retention Credit (ERC) through the end of the year.
For employers with outstanding PPP loans, they may want to think twice before rushing to submit their PPP forgiveness application. PPP loan proceeds may be includible in gross receipts for ERC purposes and therefore affect an employer’s ability to meet the gross receipts decline threshold.
ERC Eligibility Refresher
As a reminder, an employer is eligible for the ERC through one of two ways during 2021:
- A full or partial suspension of operations due to a government order; or
- A gross receipts decline of over 20% when compared to the same quarter in 2019.
The gross receipts decline test can be met by looking at the current quarter and comparing it with the same quarter in 2019. Alternatively, the prior quarter lookback method is available in 2021, which compares the immediately prior quarter to that same prior quarter in 2019.
PPP Forgiveness May Be Considered Gross Receipts for ERC Purposes
When a borrower receives forgiveness of its PPP loan, the forgiveness is treated as income under generally accepted accounting principles (GAAP). There are two methods allowed under GAAP accounting for PPP loans (see our recent article on this). If the borrower is opting to use Debt Accounting, forgiveness is recorded as income on the date of the forgiveness decision by the SBA. When using Grant Accounting, forgiveness is recorded when all conditions for receiving forgiveness are removed, presumably either the date which the borrower can demonstrate it spent the PPP proceeds or the end of its covered period.
The SBA issued guidance earlier this year that states, for PPP Round 2 eligibility, income from the forgiveness of PPP Round 1 loans is not includible in the PPP gross receipts calculation. However, the IRS and SBA have different rules.
While guidance is clear from the IRS that the income from PPP loan forgiveness is not taxable, gross receipts is a broad term that includes both taxable and tax-exempt income. Therefore, absent further guidance from the IRS, it appears PPP loan forgiveness is includible in the gross receipts calculation for ERC purposes.
New Guidance Does Not Clarify This Issue
The IRS knows this uncertainty exists but has yet to release any formal guidance that indicates how PPP forgiveness is treated for ERC purposes. It issued two notices in March on the ERC (Notice 2021-20 and Notice 2021-23). While Notice 2021-20 included information on the PPP/ERC interplay, it included no clarification on whether PPP proceeds are considered gross receipts for this purpose.
Planning Opportunities for Employers
If a PPP borrower is claiming eligibility for the ERC under the significant gross receipts decline option, it must understand the impacts its forgiveness has on its ERC eligibility. While achieving full PPP loan forgiveness should be the primary goal for borrowers, a borrower needs to understand how PPP forgiveness may affect its eligibility for the ERC.
Debt Accounting
If a borrower is utilizing Debt Accounting for its PPP loan, the borrower may want to be strategic in when it applies for forgiveness. Forgiveness decisions for mid to large sized loans are taking longer than expected. Even though the SBA has a 90-day timeframe to review the applications, we are hearing of borrowers waiting longer than 90 days for their final decision. We expect this to change in the months ahead now that no new PPP loans are being made. Additional SBA resources can now be directed towards the forgiveness process, hopefully speeding things up.
If a borrower is relying on ERC eligibility due to a gross receipts decline, it may want to wait until later in Q3 or Q4 to submit its forgiveness application with its lender, so it continues to remain eligible for the ERC through the end of 2021. As a reminder, a borrower can rely on its current or prior quarter to demonstrate its significant decline in gross receipts for 2021. See our recent article for further details.
Grant Accounting
If a borrower is using Grant Accounting for its PPP loan, carefully consider the impacts this may have on the gross receipts once the covered period is over. Again, a borrower may still qualify in the current quarter by using the alternative lookback quarter instead. And since the Grant Accounting method is more predictable than Debt Accounting, borrowers should plan ahead and group other major revenue boosts within the same quarter that forgiveness is recorded.
This presents a unique planning opportunity, particularly with not-for-profit organizations. When a not-for-profit organization sells investments or liquidates a CD, the gross receipts from this sale are included for ERC purposes (for-profit organizations only include the net gain, not the gross proceeds). Many not-for-profit organizations are liquidating investments to generate additional cash flow in the coming months. If the not-for-profit is utilizing Grant Accounting and regularly liquidates investments, it should group those two events in the same quarter to increase its chances for ERC eligibility in the quarters ahead.
Next Steps
Many PPP borrowers have expressed a desire to receive PPP forgiveness by the end of the calendar year. While this may be preferrable, understand the impacts this may have to your ERC eligibility. The ERC can yield sizeable dollars to employers during a time when many can use the cash boost. Look at all factors here as you move forward in the PPP loan forgiveness process to determine what timing is best for you.
If you have questions on any COVID-19 relief options, please contact your advisor at Clark Nuber for further assistance.
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