In a Notice, IRS has provided guidance for employers claiming the Employee Retention Credit (ERC) for 2020. The Notice includes information about the changes made to the ERC by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA; PL 116-260) that are applicable to qualified wages paid in 2020.
Background.
Act Sec. 2301(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; PL 116-136) created a refundable payroll tax credit (“the Employee Retention Credit” or “ERC”). For 2020, the ERC can be claimed by eligible employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts (“eligible employers”). The credit is equal to 50% of qualified wages paid, including qualified health plan expenses. The maximum credit per employee is $5,000.
Under the CARES Act, the ERC was not available to employers receiving Payroll Protection Program (“PPP”) loans, or to federal, state, or local governments including their political subdivisions or instrumentalities. (CARES Act Sec. 2301(j))
IRS issued detailed FAQs regarding the ERC. See IRS issues detailed employee retention credit FAQs (05/01/2020).
In December 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA; PL 116-260) retroactively amended the ERC to allow eligible employers to claim the credit even if the employer obtained a PPP loan. An eligible employer can now claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. (TCDTRA Act Sec. 206)
New guidance on ERC.
The guidance in Notice 2021-20 is provided in a question and answer format, similar to the ERC FAQs posted on IRS’s website. Notice 2021-20 addresses only the rules applicable to 2020. IRS plans to release additional guidance soon addressing the changes for 2021.
The questions and answers cover the following ERC topics: eligible employers, aggregation rules, governmental orders, full or partial suspensions of trade or business operations, significant declines in gross receipts, the maximum amount of an employer’s ERC, qualified wages, allocable qualified health plan expenses, the interaction of the credit with PPP loans, how to claim the ERC, special issues for employees and employers regarding income and deductions, special issues for employers regarding the use of third-party payers, and substantiation requirements.
IRS says the guidance in the Notice is similar to the information it posted in FAQs last year, but the Notice clarifies and describes retroactive changes under the new law that apply to 2020, primarily relating to expanded eligibility for the credit for taxpayers who took PPP loans. It explains when and how employers that received a PPP loan can claim the ERC for 2020.
Observation.
The fact that the guidance is now provided in a Notice allows taxpayers to avoid penalties if they rely on the guidance.
Here are questions and answers that provide most of the information about the interaction of the ERC with PPP loans:
Question 49: May an employer that received a PPP loan be eligible for the ERC?
Answer 49: Yes. An employer that received a PPP loan may claim the ERC for any qualified wages paid to employees if the employer is an eligible employer that meets the requirements for the credit. However, qualified wages for which the employer claims the ERC are excluded from payroll costs paid during the covered period (payroll costs) that qualify for forgiveness under the PPP. See section 7A(a)(12) of the Small Business Act, as amended by section 206(c)(1) of the TCDTRA.
CARES Act Sec. 2301(g)(1), as amended by the TCDTRA, permits an eligible employer to elect not to take into account certain qualified wages for purposes of the ERC. An eligible employer generally makes the election by not claiming the ERC for those qualified wages on its federal employment tax return. However, an eligible employer that received a PPP loan is deemed to have made the election under CARES Act Sec. 2301(g)(1) for those qualified wages included in the amount reported as payroll costs on a Paycheck Protection Program Loan Forgiveness Application (PPP Loan Forgiveness Application). Specifically, the amount for which the eligible employer is deemed to have made the election is the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven. The ERC does not apply to the qualified wages for which the election or deemed election is made. An eligible employer is not deemed to have made an election for any qualified wages paid by the eligible employer that are not included in the payroll costs reported on the PPP Loan Forgiveness Application.
Notwithstanding a deemed election, if an eligible employer reports any qualified wages as payroll costs on a PPP Loan Forgiveness Application to obtain forgiveness of the PPP loan amount, but the loan amount is not forgiven, those qualified wages may subsequently be treated as subject to CARES Act Sec. 2301 and may be taken into account for purposes of the ERC. If an eligible employer obtains forgiveness of only a portion of the PPP loan amount, then the employer is deemed to have made an election for the minimum amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application necessary to obtain the forgiveness of that amount of the PPP loan.
Example: Employer A received a PPP loan of $100,000. Employer A is an eligible employer and paid $100,000 in qualified wages that would qualify for the ERC during the second and third quarters of 2020. In order to receive forgiveness of the PPP loan in its entirety, Employer A was required, under the Small Business Administration rules, to report a total of $100,000 of payroll costs and other eligible expenses (and a minimum of $60,000 of payroll costs). Employer A submitted a PPP Loan Forgiveness Application and reported the $100,000 of qualified wages as payroll costs in support of forgiveness of the entire PPP loan. Employer A received a decision under section 7A(g) of the Small Business Act in the first quarter of 2021 for forgiveness of the entire PPP loan amount of $100,000.
Employer A is deemed to have made an election not to take into account $100,000 of the qualified wages for purposes of the ERC, which was the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven. It may not treat that amount as qualified wages for purposes of the ERC.
Question 57: May an eligible employer that files quarterly federal employment tax returns take into account qualified wages paid in a past calendar quarter in which the eligible employer may have been entitled to claim the credit, but elected not to do so?
Answer 57: Yes. An eligible employer may file a claim for refund or make an interest-free adjustment by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for a past calendar quarter to claim the ERC to which it was entitled on qualified wages paid in that past calendar quarter, following the rules and procedures for making those claims or adjustments.
An eligible employer that received a PPP loan and did not claim the ERC may file a Form 941-X for the relevant calendar quarters in which the employer paid qualified wages, but only for qualified wages for which no deemed election was made. See Q/A–49.
A special fourth quarter rule, provided by TCDTRA Sec. 206(e)(2), is also available for any qualified wages paid in the second or third quarters of 2020 that were reported as payroll costs on a PPP Loan Forgiveness Application if the loan amount was not forgiven.
Question 58: How does an eligible employer use the special fourth quarter rule in TCDTRA Sec. 206(e)(2)?
Answer 58: If an eligible employer received a PPP loan, and reported qualified wages paid in the second and/or third quarter of 2020 as payroll costs on its PPP Loan Forgiveness Application, but the loan was not forgiven by reason of a decision under section 7A(g) of the Small Business Act, then the eligible employer may take the qualified wages reported as payroll costs on its PPP Loan Forgiveness Application into account for purposes of the ERC and claim the ERC on those qualified wages on the fourth quarter Form 941. An eligible employer may also claim the employee retention credit on the fourth quarter Form 941 with respect to any qualified health plan expenses paid in the second and/or third quarter of 2020, for which the employer had not claimed the employee retention credit.
If an eligible employer elects to use the special fourth quarter rule, the eligible employer should add the ERC attributable to the second and/or third quarter qualified wages and qualified health plan expenses on line 11c or line 13d (as relevant) of the original fourth quarter Form 941 (along with any other ERC for qualified wages paid in the fourth quarter).
The eligible employer should also:
- Include the amount of these qualified wages paid during the second and/or third quarter (excluding qualified health plan expenses) on line 21 of the original fourth quarter Form 941 (along with any qualified wages paid in the fourth quarter);
- Enter the same amount on Worksheet 1, Step 3, line 3a;
- Include the amount of these qualified health plan expenses from the second and/or third quarter on line 22 of the fourth quarter Form 941 (along with any qualified health plan expenses for the fourth quarter);
- Enter the same amount on Worksheet 1, Step 3, line 3b.
Eligible employers are not required to use this special fourth quarter rule. Eligible employers may instead choose the regular process of making an interest-free adjustment or filing a claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X for the previously filed Form 941.
To continue your research on the employee retention credit, see FTC 2d/FIN ¶ H-4687.3.
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