The IRS has issued guidance regarding the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). Notice 2021-20 addresses the retroactive changes to the CARES Act resulting from the more recently passed Taxpayer Certainty and Disaster Relief Act of 2020. Under the initial legislation, PPP loan borrowers were ineligible for the ERC. However, the more recent legislation expanded eligibility to PPP recipients and this new guidance outlines when and how PPP loan borrowers can claim the ERC.
Claiming the Credit
IRS Notice 2021-20 clarifies that eligible employers can claim the credit by reporting qualified wages and the amount of the credit on their federal employment tax returns, generally form 941 Employer's Quarterly Federal Tax Return.
Non-Qualifying Payroll Costs
The notice states, "qualified wages for which the employer claims the employee retention credit are excluded from payroll costs paid during the covered period (payroll costs) that qualify for forgiveness under the PPP."
For the 2020 tax year, the ERC is available to employers who paid qualified wages after March 12, 2020, and before January 1, 2021, provided they experienced a full or partial suspension of operations or had a significant decline in gross receipts. The ERC equals up to 50% of qualified wages for up to $10,000 per qualified employee in 2020, with a maximum credit of $5,000 per employee. For further details on the ERC you can view our original article: Employee Retention Credit - Consolidated Appropriations Act.
Partial Suspension of Operations
Businesses who have experienced a "partial suspension" of operations due to a government shutdown order may be eligible to claim the credit. Notice 2021-20 states, "an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order." In establishing that "more than a nominal portion" of the business operations were suspended either of the following criteria must be met:
- the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019); or
- the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer's business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).
The notice addresses several other aspects of the legislation such as eligible employers, definition of significant decline in gross receipts, qualified wages, maximum ERC, and other FAQs. You can access the full text of the notice here: IRS Notice 2021-20.