IRS Releases Guidance on Employee Retention Credit and Paycheck Protection Program EligibilityMarch 02, 2021
The IRS just released its long-awaited guidance on how the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) interact. Let’s dive in.
Note – This notice is 102 pages in length, this blog highlights certain key information, check with your KLR advisor for more details if you are a PPP borrower looking to take advantage of the ERC. Additionally, there are many rules to follow and the examples and strategies noted in the blog may not be applicable to every situation.
As discussed in our previous blog , Looking to Take Advantage of the Employee Retention Credit in 2020 and have a PPP Loan?, many PPP borrowers have been wondering how do they take advantage of the ERC for 2020 in accordance with newly issued laws. The IRS just released Notice 2021-20, which addresses many of the questions PPP borrowers had regarding how ERC interacts with PPP. Here are some of the questions this notice answers.
This notice addresses the two main questions that we noted PPP borrowers were faced with where further clarification was required. Let’s review those questions and the answers from this notice.
Are all the wages reported on my loan forgiveness application ineligible even though they exceed my original loan amount?
Good news! Even if a PPP borrower reports more wages on their PPP loan forgiveness application than their original loan amount, only the wages up to the original loan amount will be considered ineligible. For example, if a PPP borrower reports $250,000 in wages, but their original loan amount was only $150,000, the excess of $100,000 in wages would be eligible for the ERC.
Furthermore, if the PPP borrower reported $25,000 in non-payroll costs, those non payroll costs would further increase the eligible wages for ERC to $125,000.
This is discussed in further detail in Question 49 example 2 of the notice
Strategy Note - If you have not already applied for forgiveness you should look to maximize the amount of non-payroll costs included in your application up to the maximum 60% payroll/40% non-payroll allocation limits.
How will the IRS ultimately allow early PPP borrowers who have already applied for forgiveness determine eligible wages?
In many cases, early PPP borrowers who applied for forgiveness did not include non-payroll costs in an effort to simplify their forgiveness process. Had non-payroll costs been included, theoretically the PPP borrower would have allocated less of the loan towards payroll costs, thereby increasing the wages eligible for calculating the ERC.
Unfortunately, if a PPP borrower applies for forgiveness and does not include eligible non-payroll costs in that application, then those eligible nonpayroll costs cannot be factored in when determining what is the eligible ERC wage amount.
This is discussed in further detail in Question 49 example 3 of the notice.
Determining when ERC eligible wages were paid.
Now that the amount of ineligible wages can be determined, PPP borrowers looking to calculate the ERC must determine when their ERC eligible wages were paid. Generally speaking, for 2020 there is going to be the typical time line for determining which wages are potentially eligible for the ERC before applying the shut down or gross receipts test –
- Wages paid from March 12, 2020 through the date the PPP loan was received are eligible.
- Wages paid from the date the PPP loan was received until the PPP funded wages were exhausted would be ineligible.
- Wages paid from the date PPP wages were exhausted until the end of the year would be eligible.
For example, if a PPP borrower received a PPP loan on April 13, 2020 and paid wages totaling its loan amount through June 13th, then wages potentially eligible for ERC purposes would be those wages paid from March 12, 2020 through April 12, 2020 and from June 14, 2020 through the end of the year.
Important note for PPP2 borrowers – PPP2 borrowers would follow the same methodology noted above. For example, if a PPP2 borrower received a PPP2 loan on February 15, 2020 and paid wages totaling its loan amount through April 15,, 2021, then wages potentially eligible for ERC purpose would be those wages paid from January 1, 2021 through February 14, 2021 and from April 16, 2021 through June 30, 2021.
The timing of when the wages are paid is very important for ERC purposes. As a reminder, if an entity is qualifying for the ERC under the:
- Shutdown Order – Only wages paid during the shut down order period qualify. Wages paid outside of the shutdown order period are ineligible. For example, if the shutdown order only existed during the PPP wage period then no wages would be eligible for the ERC.
- Gross Receipts – If an entity qualifies under the gross receipt’s requirement, then any wages paid during that quarter qualify. Each quarter must be tested under the ERC to determine if that quarter is eligible. For example, if the borrower only qualifies in the 2nd quarter of 2020, only wages paid from April 1st through the PPP loan disbursement date would be eligible for the ERC.
Claiming the Credit
Upon identifying the wages that are potentially eligible for the ERC, we can now calculate the amount of ERC credit a PPP borrower is eligible to claim. In order to claim the credit for 2020, PPP borrowers will be required to file amended 941 payroll tax returns for each quarter that they are eligible to claim the credit.
For 2021, eligible wages can be claimed each payroll period by reducing payroll tax deposits, filing for an advance payment of the credit or at the end of the quarter on the company’s 941 payroll tax return.
Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward.