The Internal Revenue Service released guidance Monday for employers claiming the employee retention credit for 2020 and how it relates to eligibility for the Paycheck Protection Program.
The guidance in Notice 2021-20 echoes the information the IRS has already provided in its employee retention credit FAQs, but includes some clarifications and discusses the retroactive changes to the CARES Act under the COVID-19 relief package that Congress passed in December that are applicable to 2020, mainly relating to expanded eligibility for the employee retention credit.
The Paycheck Protection Program and the employee retention tax credit were both included in the CARES Act last March as a way to help struggling businesses deal with the economic fallout from the coronavirus pandemic by providing forgivable loans from the Small Business Administration and tax credits from the IRS to companies that retain their employees. Originally they were seen as separate programs, but the stimulus package passed by Congress last December, which included the Taxpayer Certainty and Disaster Tax Relief Act of 2020, made it easier for employers to participate in both.
Accounting firms have been helping their clients navigate the complexities. “The two of these programs have become wildly popular,” said John Confrey, a senior manager at Mazars USA. “In the first round, they were mutually exclusive, so you had to pick one or the other, and this time you have the option of both. What we’re trying to analyze and take advantage of is really seeing what dollars can go into which bucket and how you can maximize the benefits of each one. There is a limitation on the dollars that go into the PPP bucket and the ERC bucket, but potentially there’s the ability to maximize both and get full forgiveness and the full employee retention credit that is available.”
For 2020, the ERC can be claimed by employers who paid qualified wages after March 12, 2020, and before Jan. 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The ERC is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.
A significant change for 2020 in last December’s COVID relief package allows eligible employers that received a PPP loan to claim the ERC, though the same wages can’t be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit. Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020.
December’s stimulus package revived the PPP and allowed businesses that got PPP loans last year to apply for a “second draw” if they still need a loan. The Atlanta-based firm of Bennett Thrasher has been helping clients deal with the complexities of the PPP and the ERC. “First and foremost, we’re advising them to evaluate the PPP loans first,” said Timothy Watt, a tax partner at Bennett Thrasher. “I think they’re far superior than the employee retention credit, not only the economic benefit but the tax benefit as well. Then we’re helping them evaluate their eligibility for the employee retention credit, which does have some overlapping similar qualifications with PPP in regard to the gross receipts test. The second-draw PPP program has imposed a decrease in gross receipts. While it’s not the same, it does have similar alignment with the employee retention credit. We’re evaluating both at the same time, as far as the gross receipts test goes, and that’s kind of a quantitative analysis.”
The IRS guidance in Notice 2021-20 also includes answers to questions such as which employers are eligible; what constitutes full or partial suspension of trade or business operations; what is meant by a significant decline in gross receipts; how much is the maximum amount of an eligible employer’s employee retention credit; what are qualified wages; how does an eligible employer claim the employee retention credit; and how does an eligible employer substantiate the claim for the credit.
While the Taxpayer Certainty and Disaster Tax Relief Act also extended and modified the employee retention credit for the first two calendar quarters in 2021, Notice 2021-20 addresses only the rules applicable to 2020. The IRS plans to release more guidance soon to discuss the changes for 2021. A page on IRS.gov explains the ERC and other aspects of the CARES Act.