The IRS has released additional guidance in Notice 2021-20 on the Employee Retention Tax Credit (ERC) with clarifications on the retroactive changes for expanded eligibility applicable to 2020. Employers who received a Paycheck Protection Program (PPP) loan have been waiting on guidance on claiming the credit in combination with forgiveness of their loan. The provisions outlined here apply to retroactive claims for 2020 as well as providing a plan for those yet to seek forgiveness.
Summary of ERC
As a reminder, eligibility to claim the 2020 ERC requires a business to have experienced a significant decline in revenues during 2020. Specifically, gross receipts for a calendar quarter during 2020 must have declined by 50% or more when compared to the same calendar quarter in 2019. Additionally, a company is eligible during any period where operations were suspended due to a government order.
- Employers with more than 100 FTEs can only claim the ERC on employees that are being paid qualified wages and not providing services.
- For 2020, the credit is available on 50% of qualified wages up to $10,000. The maximum credit amount per employee is $5,000.
- Health care costs are included when determining qualified wages.
- Wages paid as a result of the Families First Coronavirus Response Act (FFCRA) do not qualify.
In Clarification on how to apply ERC with a PPP loan
The notice clarifies when and how PPP borrowers can claim the ERC on 2020 wages.
- Wages elected to be covered by the PPP forgiveness application but not granted.
- Wages in excess of the amount of their PPP loan – Example: An employer receives a $200,000 loan for wages but pays $230,000 in wages. Apply the $30,000 wages to ERC.
- The difference in wages and nonpayroll costs that are in excess of their PPP loan – Example: If a PPP loan equals $200,000 and the employer has $200,000 in forgivable wages and $70,000 in forgivable nonpayroll costs, reserve $70,000 in wages for ERC.
- Those that have already received forgiveness cannot amend their application to claim nonpayroll costs.
- For those yet to apply for forgiveness and eligible for the ERC, you will want to accumulate and submit nonpayroll costs to maximize eligible wages for the ERC.
The ERC requires specific documentation and support of facts and circumstances in order to qualify and receive the credit. For assistance with claiming the ERC, contact us.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.