IRS Clarifies Eligibility For 2020 Employee Retention Credit

By Amy Lee Rosen · Law 360 Tax Authority March 1, 2021, 8:12 PM EST

The IRS on Monday released guidance for employers claiming the employee retention credit that clarified retroactive changes made to the credit for tax year 2020 and separately explained how employers who received a Paycheck Protection Program loan may claim it.

The Coronavirus Aid, Relief, and Economic Security Act  provided a refundable 50% payroll tax credit for up to $10,000 in wages for employers that had businesses partly or completely shut down or faced a significant decline in gross receipts between March 12, 2020 and before Jan. 1, 2021. While the statute made PPP loan recipients ineligible for the credit, the Taxpayer Certainty and Disaster Tax Relief Act of 2020  amended the CARES Act to strike that provision, and Monday's notice clarified this item and other eligibility expansions through the Relief Act, the government said.

"Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020," the Internal Revenue Service said.

The employee retention credit, passed by Congress in March, equals up to 50% of qualified wages paid for up to $10,000 per worker in 2020, with a maximum credit for each employee equaling $5,000 in 2020.

An employer can receive the credit for qualified wages by reporting the amounts on the designated lines of its federal employment tax returns, according to the notice. However, payroll costs that were paid for and forgiven with PPP loans are not qualifying wages for purposes of the employee retention credit, the IRS said.

"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," the notice said.

The American Institute of Certified Public Accountants in January requested the IRS provide guidance stating that filing an application for PPP loan forgiveness would not constitute an election to forego the credit for reported wages that are more than the amount of wages necessary for loan forgiveness. Then in a February follow-up letter the AICPA asked for guidance on the credit for both 2020 and 2021.

"This is an issue AICPA has advocated on and is currently reviewing the new guidance that was released," an AICPA representative told Law360 on Monday.

The notice explains who eligible employers are, what constitutes full or partial suspension of trade or business operations and what is a significant decline in gross receipts, the government said. Other issues that are addressed is the maximum amount, qualified wages and how to claim and substantiate the credit, the IRS said.

To qualify under the CARES Act, as amended by the Relief Act, a business must have been partly or totally shut down by government orders because of the pandemic or experienced a significant decline in gross receipts.

The notice explained if a governmental order requires a nonessential business to suspend operations but allows essential businesses to continue operating, the essential business is not considered to have a full or partial suspension of operations. But if under facts and circumstances, an employer operating an essential business has more than a nominal portion of its business suspended by a governmental order, then it may be considered to have a partial suspension and therefore qualify for the credit, the IRS said.

So if a business has essential and nonessential operations that are more than nominal portions, the employer may be considered to have a partial suspension if the order restricts the nonessential portion of the business even if the essential portion is unaffected, the notice said.

"In addition, an essential business that is permitted to continue its operations may, nonetheless, be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period of time during normal working hours," the IRS said.

To determine eligibility to receive the credit, business operations will be more than a nominal portion if the gross receipts from that operation is not less than 10% of total gross receipts, the IRS said. Or in the alternative to gross receipts, operations will be more than nominal if the hours of service performed by employees in that portion is not less than 10% of the total service hours performed, the notice said.

In May the IRS issued a fact sheet on how to claim the credit and issued FAQs about the credit on its website, which was most recently updated in January.

"This notice incorporates the information provided in the FAQs and addresses additional issues, including the amendments to … the CARES Act made by … the Relief Act," the IRS said. "As of the publication date of this notice, the FAQs have not been updated to reflect the changes made by the Relief Act."

Although the notice does not address changes made through the Relief Act that apply to wages paid after Dec. 31, 2020, the IRS and U.S. Department of the Treasury will address calendar quarters in 2021 in future guidance, the government said.