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AICPA Seeks Guidance on COVID-19 Relief Program Excess Wages

Posted on Jan. 25, 2021

The American Institute of CPAs has asked the IRS and Treasury to issue guidance allowing taxpayers to claim the employee retention credit for wages that aren’t used in an application for Paycheck Protection Program loan forgiveness.

The AICPA’s January 15 letter “recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.”

When the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) created the PPP and ERC, taxpayers were obliged to choose one or the other. However, the Consolidated Appropriations Act, 2021 (P.L. 116-260), enacted in late December 2020, not only refilled the fund for making PPP loans but also allowed taxpayers to use both programs.

The mutual exclusivity of the programs had the potential to cause serious headaches for firms that merged in 2020.

The AICPA noted that taxpayers can’t claim the ERC for wages used in their PPP loan forgiveness but said there are still questions about wages listed on forgiveness applications that don’t affect the amount forgiven.

The IRS’s FAQ describes the process for electing out of the ERC but doesn’t tell taxpayers what to do about wages reported on a PPP forgiveness application, according to the AICPA. Notably, while now-eligible taxpayers could have included non-payroll costs like rent and utilities as part of their forgiveness applications, many didn’t bother because their payroll costs were more than enough to cover the forgiveness amount, the letter stated.

But those applications represented taxpayer positions when they had to choose between the PPP loan forgiveness and the ERC, the AICPA noted. Now, taxpayers can divide their paid wages between both programs.

The AICPA included two examples illustrating the point. In the first, a taxpayer has a $1 million PPP loan fully forgiven on $1.5 million worth of paid wages. The $500,000 of excess wages should qualify for the ERC without the taxpayer risking its loan forgiveness, according to the institute.

The second example adds $100,000 of rent expenses for the taxpayer, which should increase the amount safely eligible for the ERC up to $600,000, according to the AICPA.

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