ERC Miniseries – Part V: ERC and PPP: Match Made in Heaven?

As you may recall from earlier episodes in this series, PPP and ERC did not always go together like peas and carrots. Under the CARES Act you could access one or the other; not both. However, upon passage of the CAA in late 2020, the rules changed and organizations could now access both in the same period as long as they don’t double-dip on wages, using the same costs for both programs.

This has led to quite a bit of strategy – or “tax planning” as our for-profit colleagues would call it – to figure out the best ways to maximize ERC and PPP (and other restricted funding) in overlapping periods. In this episode we will share a few helpful hints for how to approach this.

1. Highest bang for the buck: When evaluating if a dollar is better put towards a grant, PPP, or ERC, start with which has the greatest coverage.
   • If a grant covers full payroll costs (wages, benefits, and taxes), you are getting a $ for $ return; which is likely your best first choice.
   • PPP covers nearly $ for $ – there are maximums ($100k annualized over your covered period) and PPP cannot be used for FICA taxes; but otherwise it is pretty good coverage.
   • ERC only covers a portion – in 2020, $0.50 on the $1.00 up to $10k/employee/year; in 2021, $0.70 on the $1.00 up to $10k/employee/quarter. And when thinking of double dipping, you have to “use” all $10k to get the $5k or $7k credit. So this is usually your least coverage option and should be addressed last.

2. Stacking: You are allowed to “stack” the various funding sources. For example, if your Executive Director makes $160k/year; thus $40k a quarter, in an overlapping quarter you could use $25k of wages towards PPP, $10k of wages towards ERC, and have $5k left “unused” or that could be covered by a grant.

3. Prioritizing: In most cases, the math shakes out the best if you start with your highest wage earners going towards PPP and saving your lower wage earners for ERC, pulling only the minimum amount needed to reach full PPP forgiveness.

4. Look at the full PPP Picture: PPP has more allowable/eligible costs than ERC, so “fill the PPP bucket” with costs that you can’t use for ERC first. For example, non-payroll costs like rent and utilities for the full 24 weeks should go in your PPP bucket first. Then payroll costs that aren’t eligible for ERC like employer retirement, disability, and state/local taxes. Now the amount of wages needed for PPP forgiveness will be less. The other important consideration often missed is if you will have a reduction quotient for PPP. This happens when your FTE has gone down in the covered period vs. the lookback period, and it requires you to have more eligible costs than the loan amount. For example:

Loan amount: $500,000

Reduction Quotient: .75% [75 FTE in CP vs. 100 in best lookback period]

Required Expenses: $500k/.75 = $666,666.67

Less non-wage/benefit costs: $100,000

Required wages and benefits for PPP: $566,666.67

5. Documentation and Support: While doing this mix-match-mash process can lead to significantly more relief funding for your organization, be sure you have careful and clear documentation of the allocation of wages and other costs, tie out to underlying support, and add a narrative to your files outlining how you were eligible for ERC, where you overlap with PPP and other sources, and your approach to allocation. If you are ever audited in the future, this complete file will surely help make that process less painful for all involved.

Alright, that is it for this time, folks. Thanks for tuning in and we hope this is helpful as you navigate this fun funding puzzle. But as I tell lots of my clients, we nonprofit finance nerds are FAR more used to doing this wage allocation game than our for-profit counterparts, so this isn’t fully unfamiliar to us. Lucky us!

Only one final episode in this series- join Laura Kenny and myself for the series finale – all about how and when to record the credits on your financials and 990. Have a great weekend!