On March 1, 2021, the Internal Revenue Service (IRS) issued Notice 2021-20, which provides guidance to employers claiming the Employee Retention Credit (ERC) and includes rules explaining how businesses with forgivable Paycheck Protection Program (PPP) loans can now qualify for the ERC retroactively for 2020.
As enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP offered loans of up to $10 million to many small businesses and nonprofit organizations. The loans were to be used for payroll and certain nonpayroll expenses and are generally forgivable if program rules are met.
The CARES Act also included the ERC, which was likewise designed to help struggling businesses keep employees on their payrolls during the pandemic. Under the CARES Act, however, a business had to choose between a PPP loan or the tax credit. In December 2020, a new COVID-relief bill, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), was enacted with an extension of the ERC through June 30, 2021, and a significant change that permits employers who received a PPP loan to now claim the ERC, both retroactively for 2020 and going forward for 2021.
One important restriction in the rules, however, is that the same wages cannot be counted both for loan forgiveness of a PPP loan and for qualified wages under the ERC. Notice 2021-20 explains when and how employers that received a PPP loan can claim the ERC for 2020 and details the rules that apply to determine how to treat wages for purposes of each program.
Notice 2021-20 also provides answers to these questions:
- Who are Eligible Employers;
- What constitutes full or partial suspension of trade or business operations;
- What is a significant decline in gross receipts;
- How much is the maximum amount of an Eligible Employer’s ERC;
- What are “qualified wages”;
- How does an Eligible Employer claim the ERC; and
- How does an Eligible Employer substantiate the claim for the credit.
The Relief Act also extended and expanded the ERC for the first two quarters of 2021 with the expansion of the eligibility requirements effectively providing a very valuable tax credit to Eligible Employers for the first half of 2021. The American Rescue Plan. which has been approved by Congress and is expected to be signed by President Biden, would further extend the ERC through the end of 2021, i.e., for 3Q and 4Q with the same expanded eligibility rules.
With the new expanded ERC, the tax credit rate is increased to 70% of qualified wages (up from 50%), and the limit on per-employee wages that can be counted is increased from $10,000 per year to $10,000 per quarter. The business-loss threshold has been lowered to 20% of gross receipts down from 50% (compared year-to-year using 2019 data). The definition of a “Small Employer” now uses a threshold of 500 employees up from 100 employees, which effectively increases the value of the ERC significantly for those companies qualifying as Small Employers, who are allowed to take the ERC for “all qualified wages” even if employees are providing some services.
Notice 2021-20 addresses only the rules applicable to 2020. The IRS News Release states that the IRS plans to release additional guidance addressing the changes for 2021 in the near future.
Many businesses opted to apply for PPP loans instead of claiming the credit in 2020, because they provided more relief to businesses, but now all employers should take another look at the ERC program to see if they qualify – both for 2020 and going forward for 2021. The ERC’s qualification rules are complex, however, so it is advisable for companies to ensure they have a clear understanding of the IRS guidance before claiming the credit on their quarterly employment tax returns.
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