On March 1, 2021, the IRS issued Notice 2021-20, which provides guidance in the form of seventy-one questions and answers for employers interested in claiming the Employee Retention Credit (ERC) for 2020, a tax credit provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27, 2020. The ERC is available to eligible employers—business owners that were required to fully or partially suspend their operations in 2020 because of a governmental order or whose gross receipts declined by more than 50 percent compared to the same quarter in 2019 but who nonetheless retained and paid employees. The credit is equal to 50 percent of the qualified wages (including allocable qualified health plan expenses) that business owners pay their employees, up to a maximum of $10,000 in qualified wages per employee, to offset their 6.2 percent share of Social Security taxes.
The ERC was extended and modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Tax Relief Act of 2020) passed in late December 2020. Notice 2021-20 discusses the ERC only as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The IRS will address the changes applicable to the ERC pursuant to the Tax Relief Act of 2020 for qualified wages paid after December 31, 2020, in future guidance.
Notice 2021-20 provides important information for employers that intend to claim the ERC, and some of the most substantive guidance addresses PPP borrowers. Under the CARES Act, the ERC was not available to eligible employers who received a PPP loan. However, the Tax Relief Act of 2020 changed the law to expand eligibility for the ERC to PPP borrowers, making the modification retroactive to the original effective date of the CARES Act. If an employer claims the ERC for qualified wages, however, those wages are excluded from the payroll costs paid during the covered period that qualify for forgiveness under the PPP.
The CARES Act, as amended by the Tax Relief Act of 2020, allows an employer to elect not to take certain qualified wages into account for purposes of the ERC. Generally, an eligible employer makes the election by not claiming the ERC for those qualified wages on its federal employment tax return. However, Notice 2021-20 includes the following clarifications regarding the election relevant to PPP borrowers in Question 49:
- An eligible employer that is a PPP borrower will be deemed to have made the election for qualified wages included in the amount reported as payroll costs on a PPP loan forgiveness application up to, but not exceeding, the minimum amount of payroll costs along with any other eligible expenses reported on the application sufficient to support the amount of the PPP loan that is forgiven.
IRS Example: If an employer received a PPP loan of $200,000, paid $250,000 in qualified wages, and submitted a PPP loan forgiveness application reporting the $250,000 in qualified wages, the employer will be deemed to have elected not to take into account $200,000 of the qualified wages for purposes of the ERC, but will not be deemed to have made that election with respect to the other $50,000 of qualified wages. Thus, the employer may treat the $50,000 as qualified wages for purposes of claiming the ERC.
- To the extent that an eligible employer does not include qualified wages as payroll costs on a PPP loan forgiveness application, the eligible employer will not be deemed to have elected not to take those qualified wages into account for purposes of the ERC.
- Even if an eligible employer is deemed to have made an election as a result of reporting qualified wages as payroll costs on a PPP loan forgiveness application, those qualified wages may be taken into account for purposes of the ERC if the loan is not forgiven.
- If an eligible employer obtains only partial forgiveness of a PPP loan, the employer will be deemed to have made an election only 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.
The deemed election described in Notice 2021-20 is helpful because employers that obtained a PPP loan in 2020 were prohibited under the CARES Act from claiming—and thus did not claim—the ERC for any qualified wages before the retroactive changes made in the Tax Relief Act of 2020. Unfortunately, if the employer only included qualified wages and did not include nonwage expenses on the PPP loan forgiveness application, there is currently no process for borrowers to amend a previously submitted PPP loan forgiveness application to report nonwage expenses, even if the employer paid sufficient qualified wages to have benefited from both PPP loan forgiveness and the ERC.
IRS Example: If an employer received a PPP loan of $200,000, paid $200,000 in qualified wages and $70,000 in other eligible expenses, and submitted a PPP loan forgiveness application reporting the $200,000 in qualified wages but not reporting the $70,000 in other eligible expenses, the employer will be deemed to have elected not to take the $200,000 of qualified wages into account for purposes of the ERC. Although the employer could have reported qualified wages of $130,000 as payroll costs and $70,000 of other eligible expenses on the PPP loan forgiveness application, allowing $70,000 to be treated as qualified wages for purposes of the ERC, the employer cannot subsequently reduce the deemed election by the amount of other eligible expenses it could have reported on the forgiveness application.
For businesses interested in learning more about the employee retention credit and PPP loan forgiveness application or how to navigate their way through it, please contact Chris Young at 301-738-2033.
Chris Young is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby’s Business & Tax practice by clicking here.