On March 1, 2021, the Internal Revenue Service (IRS) released Notice 2021-20, providing guidance on the Employee Retention Credit (ERC) and its interaction with the Paycheck Protection Program (PPP). The ERC was originally created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed on March 27, 2020, and later amended by the Consolidations Appropriations Act of 2021 (CAA) on Dec. 27, 2020.
The guidance provided in Notice 2021-20 is “similar to the information in the employee retention credit FAQs, but includes clarifications and describes retroactive changes under the new law applicable to 2020,” per a related IRS release. The most substantive updated guidance addresses ERC eligibility for taxpayers that received a PPP loan and have received loan forgiveness from the Small Business Administration (SBA). Below is a summary of that guidance:
- An employer that applied for loan forgiveness and included more payroll than necessary to receive 100 percent loan forgiveness can treat the amount of payroll above the loan forgiveness amount as qualified wages for the ERC.
- For example, an employer included 24 weeks of payroll totaling $250,000 on the forgiveness application of a loan totaling $200,000. If the employer receives full forgiveness of the $200,000 loan amount, that employer is able to use the remaining $50,000 of payroll from that period for the ERC as qualified wages, in addition to other qualified wages during their eligibility period.
- If an employer did not include non-wage expenses in the PPP loan forgiveness application originally, the IRS does not provide a mechanism to claim these expenses after receiving forgiveness to free up payroll to be included as qualified wages for the ERC.
- If an employer applied for loan forgiveness using payroll for a time period of less than the full 24 week period (for example, if they included the first 10 weeks of payroll in the 24 week period), and the payroll coincides with the same time period of the eligibility period for the ERC, only the amount of the payroll above the loan forgiveness amount is eligible for the ERC.
While the last two bullets appear to offer no recourse for loan forgiveness applicants who submitted their application before the CAA was signed in to law on Dec. 27, 2020, and also did not include the full 24 weeks of payroll or any non-wage expenses, it is still conceivable for the SBA to provide a method for those applicants to amend their application in order to free up additional wages that can be used for the ERC. Since the SBA has not provided any guidance on the changes stemming from the CAA, there is still the possibility that additional guidance may be released by the SBA providing additional opportunity for those employers to amend their forgiveness application to free up wages for the ERC.
Although the CAA extended the ERC through the second quarter of 2021, Notice 2021-20 states that it only addresses changes to the 2020 ERC rules. The IRS plans to release additional guidance to address the 2021 changes to the ERC in the CAA. While IRS FAQs cannot be relied upon to support a legal argument in a court case, IRS notices are more authoritative and provide clarity around the IRS’s interpretation of the law.
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