Employee retention credit guide
On March 1, 2021, the IRS issued additional guidance (Notice 2021-20) advising Eligible Employers, which borrowed a PPP Loan, on how to claim the employee retention credit (recently retroactively expanded under the Consolidated Appropriations Act (“CAA”) signed into law on December 27, 2020). Note this recently issued guidance is only applicable for qualified wages paid or incurred during 2020 and future guidance will be issued for claiming the credit in 2021 filings. While much of the information, in the form of Q&A, was consistent with the IRS’ previously issued FAQs on the matter, below is the new and existing relevant information:
The CARES Act provided a refundable payroll tax credit for 50% of qualified wages paid by employers to employees during the COVID-19 crisis, March 13, 2020 through December 31, 2020.
The credit is available to employers whose (1) operations were fully or partially suspended, due to a government mandated COVID-19-related shutdown, or (2) gross receipts declined by more than 50% when compared to the same quarter in the prior year.
For 2020, the credit is provided based on the first $10,000 of compensation, including health benefits, paid to an eligible employee.
Note: The previously mentioned background information is only relative to 2020 qualified wages. The CAA implemented notable changes to 2021 including:
Expansion of the credit on qualified wages paid through June 30, 2021,
Increases the maximum credit amount equal to 70% of $10,000 of qualified wages paid to an employee per calendar quarter (as compared to 2020 amount of 50% of $10,000 per the entire year),
Adjusting the magnitude of the decline in gross receipts from being more than 50% relative to the same calendar quarter in 2019 to 20% of the gross receipts in the same calendar quarter in 2019.
Interaction with PPP Loan:
The CAA retroactively expanded the Employee Retention Credit to taxpayers which borrowed a PPP Loan.
However, the employer is not permitted to receive a payroll tax credit for qualified wages paid during the PPP Loan’s Covered Period which are used for loan forgiveness. In other words, a taxpayer may only seek the payroll tax credit on qualified wages paid in excess of the payroll costs used on the PPP Loan Forgiveness Application.
Ex. Taxpayer incurred $100,000 of qualified wages during Q3 2020 and Q4 2020. Taxpayer received a PPP Loan in the amount of $75,000 and reported $75,000 of payroll costs (and $0 other eligible expenses) on the PPP Loan Forgiveness Application. Taxpayer may only claim the employee retention credit on the $25,000 of wages as this amount is in excess of what qualified for PPP Loan forgiveness.
Accordingly, there is strategy on the quantity of payroll costs versus other eligible expenses to report on the PPP Loan Forgiveness Application in order to maximize loan forgiveness and payroll tax credits.
These are favorable rules for PPP Borrowers which have not applied for forgiveness yet. Accordingly, the SBA has been encouraged to release guidance on how to amend the PPP Loan Forgiveness Application.
In the event the eligible employer seeks PPP Loan forgiveness and the SBA does not approve any portion thereof, the eligible employer can claim the payroll credit for such qualified wages. The IRS has issued guidance on how to claim the credit using a “special fourth quarter rule.”
Relevant Guidance on Definition of Full or Partial Suspension due to Government Order:
When is an essential business considered to be partially suspended? If more than a “nominal” portion of the employer’s business operations are suspended by a governmental order, the employer may qualify for the credit.
Nominal portion of the business is defined as either: (i) 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 (ii) 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).
Note that an employer’s voluntary suspension of a portion of operations does not qualify for the credit. The suspension must be due to an authoritative body’s order.
The guidance issues a list of factors which should be considered in determining if an employer is partially suspended including, but not limited the following: (i) employer’s telework capabilities, (ii) portability of employee’s work, (iii) necessity of working in the office, (iv) time for transition to telework activities.
How to Claim the 2020 Credit:
For qualified wages paid in prior quarters in 2020, eligible employers may claim the credit retroactively by filing the Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the relevant calendar quarter.
Eligible employers should maintain the following information for at least four years:
The Employee Retention Credit process can be a tricky one, so please feel free to reach out to the Badger CPA team if you believe this credit may apply to you. We can assist with confirming and filing appropriate amended returns, and answer any questions you may have.