There was welcome news from the Internal Revenue Service (IRS) this week, as the much-anticipated guidance on the Employee Retention Credit (ERC) was issued. While Notice 2021-20 (Notice) contains a great deal of information that was previously provided in the ERC FAQs on the IRS website, it does confirm and clarify various aspects of the credit. Note, this guidance is for calendar quarters in 2020 only. A separate news release from the IRS explains that it plans to release additional guidance soon addressing the ERC changes for 2021.
ERC and PPP Loans
Most importantly, Notice 2021-20 officially confirms that taxpayers who received Paycheck Protection Program (PPP) loans are now eligible to claim the ERC retroactively to March 2020. In addition, Question #49 in the Notice provides several examples of the interaction of the ERC with a PPP loan. The focus of the examples is the fact that qualified wages that qualify for forgiveness under the PPP must be excluded from the calculation of the ERC, and vice versa. This corresponds with the idea of no “double-dipping” between PPP forgiveness, the ERC and other federal tax credits, such as the Work Opportunity Tax Credit (WOTC), that was highlighted in the initial guidance. This also confirms that, when calculating the ERC retroactively, taxpayers must analyze the amount of qualified wages utilized to obtain the PPP forgiveness and reduce the qualified wages paid by that amount. Previously, this fact wasn’t clear.
Another critical item clarified by Notice 2021-20 is the definition of “nominal” as it relates to a full or partial shutdown of operations. Previous ERC guidance in the IRS FAQs stated that a business may be considered to have a partial suspension of operations if more than a nominal portion of its business operations are suspended by governmental order. However, the term nominal was not defined.
Question #11 in Notice 2021-20 clarifies that a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either:
- The gross receipts from that portion of the business operations are 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).
Further, Question #18 provides examples of the types of modifications that a government order may require that could have a more than a nominal effect on business operations. Several examples are listed, including limiting occupancy due to social distancing and changing the format of service. These examples were not provided in the initial guidance.
Notice 2021-20 and the IRS FAQs
Notice 2021-20 also provides additional clarifications on topics such as claiming and substantiating the ERC, as well as several new detailed examples. Question #17, in particular, contains multiple examples of what constitutes a suspension of operations due to a governmental order. Note that the IRS has also updated its ERC FAQ website to show that the page is no longer current. Taxpayers are directed to see Notice 2021-20 for guidance on the ERC as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021.
Another Possible Extension?
On Saturday, February 27, 2021, the U.S. House passed bill H.R. 1319, the American Rescue Plan Act of 2021. This bill would extend the ERC under the 2021 rules through the end of 2021. It is currently set to expire on June 30, 2021. The bill now moves to the U.S. Senate.
GBQ continues to monitor ERC developments. If you have questions, please contact your GBQ advisor.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services
Lorani Orobitg, CPA
Manager, Tax and Business Advisory Services
Tax Advisory Services