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Recent news of possible COVID relief in the form of the GOP’s $700 billion package to the Democrat’s $1.9 trillion package may obscure the fact that there was a relief package adopted in December.

December’s relief package expanded the expenses that can be paid through a PPP loan, helped clarify and modify what qualified as forgivable expenses, modified the Employee Retention Credit, and did a bunch of other stuff too numerous and sleep-inducing to detail herein.

One important feature is that the December legislation specified that expenses paid from the PPP loan funds are considered deductible expenses. This is great news for companies hit heavily by the pandemic as they will now be able to have the loan forgiven and take the tax deductions for expenses paid by the loan.

Over the past month, we have been noodling the complicated interplay that exists among 1) the first and second draw of PPP funds, 2) the new and revised rules for the Employee Retention Credit, and 3) their effect on the Research and Development Credit that so many of our clients have been able to use to offset their taxes.

We can’t clarify everything herein, but we can make a bit of a dent in some of your existing confusion.


Here are some of our take-aways with respect to maximizing the benefits of the PPP, second draw PPP, the ERC, and R&D.

  • It appears to us that receiving PPP forgiveness is better than any credit available. PPP funds add cashflow to your company’s coffers, and the loans are not taxable on your federal returns. Our advice? If you qualify for a PPP Second Draw loan, apply. And apply sooner rather than later as funds might run out!
  • Companies who employ more than 100 people cannot take advantage of the Employee Retention unless they are paying people not to work.
  • Let this be said: It is safer to use all of your payroll expenses in your PPP loan forgiveness application as proof of eligibility for forgiveness. However, if you instead tap into the entire parade of potentially eligible expenses in your PPP loan forgiveness application, you can look into excluding some employee wages from the forgiveness application and instead use these wages to qualify for the Research and Development Credit or the Employee Retention Credit.
  • Care should be taken when considering the wages you will pay using your PPP loan. Remember that you have 24 weeks to use Second Draw funds. Many of these weeks may extend beyond the June 30 quarter, which is the last quarter the Employee Retention Credit currently is available. In other words, the same employee that is used to claim PPP forgiveness can be used to get ERC, so long as the ERC periods did not include that employee’s wage being claimed for forgiveness.
  • You have three years to amend payroll tax filings for the Employee Retention Credit, which means you have some time to make choices about ERC.
  • Employee Retention Credit eligible time periods have priority over PPP. Since you cannot claim PPP forgiveness on employee wages that qualify for ERC, those wages cannot be used to take advantage of forgiveness. A process is in place for electing out of ERC credits for certain wages, and then undoing that election if the PPP is not ultimately received.
  • Wages paid to employees in 2020 that were not used to help you gain forgiveness may be available, through the process of amending your second- , third- , or fourth-quarter payroll tax returns, for an ERC credit, and for a refund of those payroll taxes.
  • We suggest gathering all the data you might need for all three benefits (PPP, ERC, and R&D). Lay it all out and see where things fall. We or your other advisers can help with this task.

Since wages used for PPP or ERC do not qualify for R&D credits, care must be taken to maximize all of these. For example, if you are a small employer who can use the first $10,000 of wages paid to an employee for an ERC credit, that employee may not be used for R&D, according to our understanding (and it is admittedly unclear). Maybe that employee can be used in the third or fourth quarter of 2021, but not for quarters in which the company claims the ERC. This interplay is complicated, and we suggest that your professionals work together before you make any claims so that they can, in their collective wisdom, advise you on how to progress to maximize your benefits.

If you have already read enough of this jumbled confusion to know that you’d rather seek guidance than sort through the mud yourself, you can stop here because it only gets more complicated! But if you want to sort through the mess to try and find a little more clarity, here goes …

Let’s take each benefit one at a time.


Back in December, the forgivable expenses allowed under a PPP loan were expanded. The relief bill also changed the forgiveness so that companies who took less than $150,000 could use the simplified forgiveness form. This was a change from the previous cap of $50,000.

This is good news for those of you with loans between $50,000 and $150,000 (though many of you have already had your loans forgiven) because it reduces the paperwork required to process your forgiveness application.

You might recall that businesses have 24 weeks to spend their PPP loan proceeds for permitted expenses, which may include payroll, group health, rent, worker protection expenditures, and utilities. Even property damage costs may qualify. (If you have not yet applied for forgiveness, be aware that this is a broad description of permitted expenses, so don’t rely on the strength of this communication when it comes to your decisions about how to spend the PPP money!)

In addition to the first PPP loan fund, which began in April of 2020, there is also a “Second Draw” fund, which is available to employers with fewer than 300 employees. The Second Draw loans are for businesses that have received prior PPP funds and used the full amount of that first PPP loan

The Second Draw has many of the same requirements and definitions as the first PPP loan, but there are some differences. For example, the cap on the loan amount is $2 million down from the previous cap of $10 million in the original PPP package. Businesses must meet the “necessity” requirement and, while open to interpretation, this requirement has some flexibility.

Hedge funds, private equity, and public companies are not eligible.  Other ineligible businesses include rental real estate, private clubs, lenders, legal gambling and, of course—criminals.

The business must be able to demonstrate that they had a 25 percent drop in revenue for any quarter in 2020 as compared to the comparable quarter in 2019. The loan can be as much as 2.5 months times the business’s average monthly payroll. Those in the hospitality industry can get as much as 3.5 times their average monthly payroll.

Sorry—if you were not in business February 15, 2020, you don’t qualify for PPP. You also don’t qualify for the Second Draw if you didn’t apply for the first round of funding.

There are a whole bunch of other rules, so ask us or your other advisors for more information.


The Employee Retention and Rehiring Credit (ERC) was due to expire at the end of 2020. The Coronavirus Relief Package extended that provision for an additional two quarters to July 1, 2021.

The big change here, among several big changes, is that a business can use both the PPP and the ERC in 2020 and 2021.

The original CARES Act prohibited an employer from taking advantage of both subsidies, but under more recent legislation, businesses do not have to make a choice between PPP and ERC. Mind you: A business cannot “double dip” by using the same payroll for an ERC as it uses as an eligible PPP loan forgiveness expense.

A business is considered eligible for ERC beginning with the quarter in 2020 that produced 50 percent less in gross receipts than the corresponding quarter in 2019. That business continues to be eligible until the end of the quarter whereby gross receipts have increased to at least 80 percent of the same quarter in 2019. For 2021, a business can use ERC in all quarters that produced less than 80 percent of the gross receipts in the corresponding quarter of 2019.

If this is confusing, keep in mind that there is more: There is a whole other alternative to this, so talk to us or your adviser if you think you might qualify. If the government did not permit you to be in business, or you were partially suspended, yes, you do qualify.

An employer with 100 or fewer monthly full-time equivalent (FTE) employees in 2019 may use the ERC for wages of working and non-working employees. For employers with more than 100 employees, the ERC works only for wage continuation of non-working employees. For the 2021 quarters, the FTE count goes to 500 instead of 100.

For 2020, that credit was computed using a maximum of 50 percent of qualified wages up to $10,000 per quarter to 70 percent of qualified wages up to $10,000 per quarter. For 2020, once you take up to $5,000 of credit for an employee, that employee is no longer eligible. In 2021, the $7,000 per-quarter, per-employee is not so limited.  That means for 2021, you could use that $7,000 in both quarters.

The term “qualified wages” basically mean wages paid to all or some of their employees, including health plan expenses, even if wages were not paid to a particular employee. There are some excluded wages like amounts paid to your relatives, so check with us for more details.

The new law provides that employers, in 2021, may receive an advance for a quarter based upon 70 percent of average quarterly waged paid by the applicant in 2019.

Admittedly, we just threw a bunch of numbers your way that may or may not help clarify matters. We invite you to take a deep breath now, though the next section isn’t that much easier to understand …



The availability of credits for expenditures by a company for research and experimentation has been an important feature of the tax credit world for many years. The idea is that a certain percent of qualified expenditures may be used as a tax credit against a company’s taxes on their income.  Along with other costs, research wages will be included in the expenditures that qualify for the credit. The credit is based upon incremental expenditures, and we will not detail how to do that here for fear of spending the next seventeen hours trying to communicate the various if/then scenarios.

We work with several companies, in collaboration, to assist people who think they might qualify to take full advantage of that credit.

The interesting thing to note is this: Based upon our understanding, expenditures that were used for PPP or ERC are not qualified for use in computing available R&D credits.



This is a changing landscape, and we are doing our best to roll with the rules as they are today, but one thing is sure: The rules are bound to change and throw us upside down.

We don’t say this so that you will send us flowers or bottles of Pinot. We say it because want you to know that in this case, it might pay to wait before taking action. For instance, those of you who filed your PPP loan forgiveness applications early might wish that you had waited in light of the new rules that allow you to use the easy form for loans up to $150,000.

It is great news that PPP loans are not taxable on your federal returns, but we still don’t know whether they will be deductible for California state taxes. We hope expenses will be deductible, but we don’t know. If you file your California state taxes today, you cannot deduct expenses paid for by a PPP loan. If the rules change, you will then need to amend your tax filings.

Of course, many of your businesses aren’t in California, and states are wildly incongruent. Montana announced that PPP debt cancellation is not taxable, and the expenses that PPP funded are also deductible—just like Federal Law. Montana has been silent so far on the Second Draw, but one would expect the rules to be consistent.

Wisconsin, on the other hand, will not allow the deduction of expenses paid with forgiven PPP funds. With the Second Draw, Wisconsin takes the position that forgiven funds will be considered income, but it will allow deduction of expenses paid by those funds.


Keeping up with these announcements is a thrill a minute!

For this same reason, we are also struggling with people’s quarterly tax estimates and payments. Since we don’t know whether the expenses will someday be deductible, we are having to make payment calculations on numbers that might end up being stale.

There’s no right or wrong answer here, but one thing to keep in mind is that unless you have a compelling reason to act quickly, you might want to wait on filing taxes and filing your PPP loan applications. You don’t need to file right away, and you might end up adding work to your schedule if you do file early this year.

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