IRS Releases 71 Questions to Clarify the Employee Retention Credit
March 3, 2021
- The IRS issued new guidance for employers claiming the Employee Retention Credit (ERC) for 2020 calendar quarters.
- The guidance includes clarifications and describes retroactive changes under the new law applicable to 2020.
- There are three, main points employers should take away from the guidance: clarification on the ERC’s interaction with PPP loans, the definition of a nominal impact and new substantiation requirements.
- Contact Aprio today if you would like to discuss this new guidance or your ERC and PPP strategy in general.
On March 1, 2021, the Internal Revenue Service (IRS) issued new guidance, titled Notice 2021-20 (the Notice), for employers claiming the Employee Retention Credit (ERC) for calendar quarters in 2020. Many of the 71 questions in the Notice are similar to the IRS FAQs previously released on the ERC; it includes clarifications and describes retroactive changes under the new law applicable to 2020, primarily related to expanded eligibility for the credit.
The three, big takeaways from the Notice are:
- Guidance on excess payroll costs for Paycheck Protection Program (PPP) loans that have already been forgiven;
- Defining a nominal impact; and
- Substantiation requirements.
Keep reading for more information on these three takeaways and how they apply to employers eligible for the ERC.
Interaction with PPP loans
In a previous article, we discussed how PPP loan recipients are now eligible to retroactively claim the ERC, noting that an eligible employer cannot use the same wages for requesting PPP loan forgiveness and for claiming the credit. No “double dipping” — makes sense.
On a prospective basis, this delineation of wages is addressed in revised PPP loan forgiveness applications (Form 3508S, Form 3508EZ and Form 3508), where the instructions note that a borrower should “not include qualified wages taken into account in determining the Employee Retention Credit.”
However, businesses that already applied for loan forgiveness were instructed to report the payroll costs paid or incurred during the covered period, which in many instances exceeded the amount of forgiveness they were requesting. The Notice provides much-needed clarification on how, and to what extent, a business may utilize payroll reported on forgiveness applications for PPP loans that have already been forgiven. Qualified wages previously reported on a loan forgiveness application can be used for claiming the ERC to the extent they are not utilized for loan forgiveness. Businesses should give consideration to (1) excess payroll, defined here as payroll reported in excess of the forgiveness amount, and (2) the requirement that payroll costs make up at least 60% of the forgiveness amount.
Determining what is (or isn’t) more than nominal
Many businesses have experienced a full or partial suspension in operations from a government shutdown order, which could deem them eligible for the ERC. This is applicate if an appropriate government authority imposes restrictions on a business’s operations so that the business (a) must cease all operations (fully suspended), or (b) still can continue to operate with some, but not all, of its normal operations (partially suspended).
The concept of “partially suspended” comes up frequently in our conversations with the business community. As we have previously discussed, this occurs when a business may not be operating at “normal capacity,” because of imposed restrictions from a government authority that limit commerce, travel or group meetings. What is often misunderstood is that a company may be considered eligible for the purposes of the ERC from both direct and indirect causes
When evaluating a partial suspension, it’s imperative to establish that the impact the government orders have on the business is more than nominal, a term that previously has been undefined. As described in the Notice, nominal is defined as either:
- The gross receipts from that portion of the business’s operations is not less than 10% 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% 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).
An eligible employer will adequately substantiate eligibility for the ERC if it creates and maintains records that include the following information:
- Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including:
- Any governmental order to suspend the employer’s business operations;
- Any records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a government order or whether a government order had more than a nominal effect on its business operations;
- Any records the employer used to determine it had experienced a significant decline in gross receipts;
- Any records of which employees received qualified wages and in what amounts; and
- In the case of a large eligible employer, work records and documentation showing that wages were paid for the time an employee was not providing services.
- Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
- Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for the purposes of the ERC and, if so, how the aggregation affects the determination and allocation of the credit.
- Copies of any completed Forms 7200 that the employer submitted to the IRS.
- Copies of the completed federal employment tax returns that the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on the federal employment tax return).
An eligible employer should keep all records of employment taxes for at least four years after the date the tax becomes due or is paid, whichever comes later.
The bottom line
Like other IRS notices, this Notice is not a formal regulation and does not supersede the Internal Revenue Code. Accordingly, the information contained in the Notice is generally not guidance that can be cited as the law in court. Rather, the Notice, like the IRS’s FAQs, provides some areas in which taxpayers can understand what the IRS’s position likely is, albeit the guidance is not all-encompassing.
While the ERC has been modified and extended for the first two calendar quarters in 2021, the Notice only addresses the rules applicable to the ERC claimed for 2020. Ongoing monitoring of guidance, documentation and strategy are critical for maximizing the benefits of these COVID relief programs, while mitigating risks to an acceptable level.
Since the onset of the COVID-19 pandemic, Aprio has established a dedicated PPP and ERC team that is continuously monitoring new guidance impacting each of these programs to ensure we have the latest information when advising our clients.
If you would like to discuss your ERC and PPP strategy, contact us today.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up-to-date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.