The IRS has just issued Notice 2021-20 which provides for employers claiming the Employee Retention Credit for calendar year quarters in 2020.

The credit was originally enacted by the Coronavirus Aid, Relief, and Economic Security Act (CARES), and then amended by the Taxpayer Certainty and Disaster Tax Relief Act (Relief Act). This Notice is much like the guidance the IRS previously provided in its “frequently asked questions” responses regarding the Employee Retention Credit. However, this Notice includes clarifications, and describes retroactive changes under the Relief Act, primarily relating to expanded eligibility for the credit.

The credit as originally enacted began on March 12, 2020 and ended before January 1, 2021 for eligible employers. Here are some details:

  • The credit is for those employers who experienced a full or partial shutdown of their operations or a significant decline in gross receipts.
  • The credit is equal to 50% of qualifying wages and qualified health plan expenses with a maximum of $10,000 per employee, so the maximum credit for any one employee would be $5,000.
  • The credit, which is refundable, is claimed on Federal Form 941 against employer’s social security taxes, and the social security portion of railroad retirement taxes for railroad employers.

Key change regarding the Employee Retention Credit eligibility

As the law was originally enacted, an employer could not claim the Employee Retention credit if they had taken out a Payroll Protection Program Loan (PPP). One of the more significant changes in the Relief Act, which extends the ability to claim the credit for eligible employers to June 30, 2021, is that eligible employers can utilize the Employee Retention Credit, even if they had taken out a PPP loan. However, the same wages cannot be counted for both calculating employee retention credit and loan forgiveness for PPP loans.

Preparing to qualify for forgiveness

  • As employers are now taking Second Draw loans, they will want to carefully analyze their costs related to PPP loan forgiveness, and those qualifying for the Employee Retention Credit to maximize both programs.
  • Employers need to be cognizant of how they complete their loan forgiveness applications and payroll tax forms. If an employer reports qualifying wages in their loan forgiveness application, they are deemed to make an election for those wages, and none of those wages would be eligible for the Employee Retention Credit. On the other hand, a taxpayer can elect to leave out otherwise qualifying wages for the Employee Retention Credit if it is more beneficial to the employer to utilize them in their loan forgiveness application.
  • In general, an employer would want to maximize their qualifying non-payroll costs in their loan forgiveness application (remember that up to 40% of the proceeds of a company’s PPP loan may be used for non-payroll costs, such as rent, mortgage interest, utilities, and other covered costs). This analysis may be quite complex, and many employers will need their tax advisors to assist them in this process.

The guidance provided in Notice 2021-20 answers questions such as:

  • Which employers are eligible?
  • What constitutes a full or partial shutdown of a business of trade or business operations?
  • What is the threshold in order to be considered to have experienced a significant decline in gross receipts?
  • What is the maximum amount of an eligible employer’s Employee Retention Credit is?
  • What constitutes qualified wages?
  • How does an employer substantiate its credit claim?

Please note that the IRS has announced that the Notice only addresses the Employee Retention Credit rules for 2020, but that it plans on releasing additional guidance to address 2021 changes since the Consolidated Appropriations Act, 2021 (passed in December 2021) allows employers who meet different eligibility requirements to further take advantage of this credit. We will continue to keep you informed as guidance becomes available.

For more information, please contact Doug Finkle at doug.finkle@sobelcollc.com

Doug Finkle is a Tax Director at SobelCo with over twenty years of experience in handling tax compliance for corporations (including consolidations), partnerships, S corporations and high net worth individuals as well as sharing his in-depth knowledge of tax laws and regulations, most particularly by leveraging his wide involvement with tax planning and developing tax minimization strategies for clients.