Employee Retention Credit FAQs

The COVID-19 pandemic has created challenging conditions for businesses across New Jersey and Pennsylvania. The environment changed almost overnight with stay at home orders and forced business closures and has persisted through restrictions and new safety guidelines. However, it is expected that some areas will regress to Stage 1 restrictions as the second wave of COVID-19 permeates the Garden State. This news means additional uncertainty for businesses that have already endured so much. It also underscores the importance of bolstering working capital and taking advantage of tax-saving opportunities. One available incentive, the Employee Retention Credit (ERC), is a refundable tax credit taken against employment taxes equal to 50% of qualified wages paid.

While it has become a popular tax saving option, several rules govern when the ERC can be claimed.  Klatzkin has summarized the frequently asked questions below.

Can a company that received a Paycheck Protection Program (PPP) loan claim the credit? 

No. A business that has received a PPP loan is not eligible to claim the ERC.

Can a company that repaid a PPP loan by May 18, 2020, claim the credit?

Yes. A business that applied for a PPP loan received payment, but then elected to repay the total loan amount by May 18, 2020, is treated as though no loan was issued for purposes of determining credit eligibility.

Can a company claim the credit when a PPP loan is repaid?

No. Once a business receives a PPP loan, they become ineligible to receive the ERC, regardless of when the loan was received or if it was forgiven.

How is credit eligibility determined when acquiring the assets of another business that received a PPP loan?

The following rules should be considered when determining if a business acquiring the assets and liabilities of another company that received a PPP loan is eligible for the ERC.

• No Assumption of the PPP loan – A business that acquires another company’s assets that received a PPP loan will not be treated as having received the loan simply by the acquisition, assuming the acquiring business does not assume any PPP loan obligations. In this case, the acquiring business is eligible to claim the credit after the transaction closing date. It is important to note that any credit claimed by the acquiring business for qualified wages before the closing date will not be subject to recapture.
• Assumption of the PPP loan – A business that acquires another company’s assets that received a PPP loan will not be treated as having received the loan, even though they are assuming the loan obligation. This is provided the acquiring business did not receive a PPP loan on or before the transaction closing date. However, it is important to note the amount of qualifying wages may be limited. For example, any wages paid by the acquiring business after the transaction to an individual employed by the target business is not eligible.

Can a business claim both the Paid Family and Sick Leave Credit and the ERC?

Yes, but not for the same wages. Any qualified wages claimed for the ERC are excluded when calculating the Paid Family and Sick Leave Credit. Under these circumstances, it is ideal to consult with a tax advisor to determine which options yield the most significant benefit.

Can a business claim the Work Opportunity Tax Credit and the ERC?

No. A business may not claim the ERC and the Work Opportunity Tax Credit for the same employee for the same period.

Contact Us

The ERC is a powerful tax savings tool that New Jersey and Pennsylvania-area businesses should consider as part of year-end tax planning efforts. However, there are specific rules that limit who can participate and the potential value received. If you have questions about the information outlined above, need assistance with claiming the ERC or another year-end tax planning issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.