On March 1 of this year the IRS issued guidance on the Employee Retention Credit (ERC) of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Through 71 FAQs, Notice 2021-20 formalizes the current IRS FAQs and also provides guidance based on changes made to the ERC program through the passage of the Consolidated Appropriations Act, 2021.
The notice only applies to the calculation of the ERC for 2020, and the IRS will be issuing guidance on the 2021 credit at some point in the future.
Notice 2021-20 provides answers to questions such as:
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 employee retention credit?
What are qualified wages?
How does an eligible employer claim the employee retention credit?
How does an eligible employer substantiate the claim for the credit?
Several of the key points in the notice are:
PPP and ERC wages: By claiming wages on a Paycheck Protection Program (PPP) forgiveness application, a taxpayer affirmatively elects to not use those wages for ERC purposes. This means a taxpayer cannot reduce wages reported on their PPP loan forgiveness application by the amount of other eligible PPP expenses that they could have otherwise reported on the PPP loan forgiveness application. Accordingly, if a taxpayer does not have other eligible PPP expenses included on their PPP forgiveness application, this could reduce the amount of the available ERC.
If you have not yet filed your PPP loan forgiveness application, it is recommended that all other allowable expenses (i.e., expenses other than wages) be reported on a PPP forgiveness application, to the greatest extent possible, while still maintaining an adequate amount of wages for PPP forgiveness.
Impact of ERC on expenses for income tax returns: On the employer’s income tax return for 2020, the deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the 2020 ERC claimed by the employer. Accordingly, you must know the amount of ERC being claimed to accurately reflect income and deductions on 2020 income tax returns. This is true for both cash and accrual basis.
Nominal effect suspension: For purposes of a full or partial shutdown, an employer must experience more than a nominal portion of its business suspended. The IRS defines a nominal portion of a taxpayer’s business as either 1) not less than 10% of the business’s total gross receipts (compared to 2019) or 2) not less than 10% of total number of hours performed by all employees of the business. This is just used in determining what is a more than nominal portion of a business.
WOTC: An employee cannot be included for purposes of computing the ERC for any period that an employer is allowed a Work Opportunity Tax Credit for that employee for that period.
Form 941-X: An eligible employer must file a claim for refund by filing Form 941-X to claim the ERC to which it was entitled on qualified wages paid in a 2020 calendar quarter. The statute of limitations for filing the 941-X is the later of three years from the date of filing or two years from the date the tax was paid.
Need assistance with the Employee Retention Credit?
Given Notice 2021-20’s guidance, we anticipate any qualifying businesses that have already filed for 2020 may need to amend their income tax returns. Other qualifying businesses that have not yet filed should file for an extension in order to fully understand the impact of this guidance prior to filing. Contact us if you have questions or need assistance.
Andrew Seifert is senior manager in the Minneapolis office of Wipfli.