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Differences in the tax treatment of the ERTC and PPP forgiveness

Differences in the tax treatment of the ERTC and PPP forgiveness

The funds received from both the PPP and the ERTC are tax-free, but there are still some differences in the tax treatment of the two programs that you need to be aware of before deciding how to proceed.

The differences in tax treatment for PPP and ERTC

The main differences in the tax treatment of the Payment Protection Program (PPP) loans and the Employee Retention Tax Credit (ERTC) are as follows:

  • The expenses that are paid for with forgiven PPP funds are tax-deductible on your year-end tax return.
  • The ERTC wages that calculated the ERTC credit are not tax-deductible at the end of the year.

This means that if you are receiving ERTC credits, you must reduce wages for the credits received.

An example of how tax treatments could affect your business

In a situation where Employers are eligible to get PPP Loan forgiveness and ERTC, they should try to take advantage of PPP Loan forgiveness instead of the Employee Retention Credit.

For example, ABC company has received a $100,000 PPP Loan. They have $40,000 in eligible non-payroll costs and $60,000 in eligible Payroll costs for PPP Loan forgiveness.

ABC is also eligible to receive the ERTC. They do not have any excess payroll costs to claim against the ERTC.

In this situation, they should go for the PPP Loan forgiveness option instead of the ERTC.

If you submit payroll costs for PPP Loan Forgiveness

The expenses covered by the forgiven PPP funds ($60,000 in Payroll costs) are tax-deductible on your year-end tax returns.

If you submit payroll costs for the ERTC

The ERTC credit amount of $60,000 is not tax-deductible. You will have to reduce wages for the credit received.

In the above example, if you are in a 20% tax bracket, you have the opportunity to save $12,000 in taxes by including your payroll costs in PPP loan forgiveness instead of using them to receive the ERTC credit.

If you need guidance on the next steps for applying for PPP loan forgiveness and the ERTC, we encourage you to reach out to our team at assist@reconciledsolutions.net for support.

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Angie Noll
angien@reconciledsolutions.net