IRS Guidance on the Relationship Between PPP Loan Forgiveness and the Employee Retention Credit
March 4, 2021
On March 1, 2021, the IRS issued Notice 2021-20 providing additional guidance on eligibility for the Employee Retention Credit (ERC) and more specifically for those participating in the Payroll Protection Program (PPP). As previously discussed, the Consolidated Appropriations Act, 2021 (CAA21) extended eligibility for the Employee Retention Credit (ERC) for businesses whose PPP loan(s) had previously made them ineligible.
The March 1st notice formally addresses uncertainties in the previous IRS FAQs on the interaction between the ERC and PPP loan forgiveness. Note that this guidance only addresses PPP/ERC implications for tax year 2020. Businesses should expect additional IRS guidance for 2021.
Under this new guidance, employers who received a PPP loan cannot take the ERC for payroll costs reported on their PPP forgiveness application that were needed to support full loan forgiveness. However, qualified wages not included in PPP payroll costs or that exceed the minimum amount required for PPP forgiveness are still eligible for the ERC.
The IRS provided several examples to show how this works:
Example 1: Employer A received a $200,000 PPP loan and reported $250,000 of eligible payroll costs on its PPP forgiveness application. Employer A is deemed to have made an election out of the ERC for the $200,000 (up to the amount of the forgiveness), but the remaining $50,000 exceeding the PPP loan amount remains eligible for the ERC.
Example 2: Employer B received a $200,000 PPP loan and reported $200,000 of eligible payroll costs and $70,000 of other eligible expenses on its PPP forgiveness application. Because of the $70,000 in other eligible expenses, Employer B only needed $130,000 of its eligible payroll costs to receive full loan forgiveness. As a result, $70,000 of the qualified wages reported as payroll costs may be treated as qualified wages for purposes of the ERC.
Unfortunately, employers who already filed for PPP forgiveness but did not include other eligible expenses on its forgiveness application cannot use these expenses to offset wages paid for purposes of receiving the ERC. Using Example 2 above, if Employer B declared $200,000 of eligible payroll costs on its PPP forgiveness application but declared no other eligible expenses, Employer B is deemed to have elected out of the ERC with respect to the full $200,000 of payroll costs even though it may have had $70,000 of other eligible expenses that could have been reported on the PPP forgiveness application.
At this time, there is no mechanism for borrowers to amend their PPP forgiveness applications to take advantage of the guidance provided in Notice 2021-20. We will have to wait and see whether the Small Business Administration (SBA) will issue procedures for employers to amend their forgiveness claims in light of this new IRS guidance.
For employers who haven’t yet applied for PPP loan forgiveness, it is wise to review their other eligible expenses prior to submitting the application in order to be able to reserve qualified wages for use under the ERC.
In addition to the PPP loan forgiveness guidance, the IRS provided additional clarification on several other topics previously unclear in the relevant FAQs:
- Clarification on “nominal portion of business” for a partial suspension – In previous FAQs, the term “nominal” was not clearly defined. Notice 2021-20 provides that a portion of the business making up 10% of a business’s gross receipts or 10% of the total number of hours of service performed by the employer’s employees is deemed to be more than nominal.
- Modifications having a more than a nominal impact – The Notice addressed circumstances determining when there is a more than nominal impact with modifications (as stated above – 10% impact on ability to provide services). Examples include limited occupancy, appointment-only services (previously offered walk-ins), restrictions on specific services such as buffets or requiring face coverings.
- Clarification on “comparable operations” while subject to a government order – The Notice added factors to consider in determining whether operations are comparable to operations prior to a government closure, including telework capabilities, the amount of portable work, the role of the physical workspace, and the transition time to be able to telework (with transitions longer than two weeks being considered significant).
- ERC Required Documentation Maintenance – The Notice provides guidance that an employer should maintain records for at least four years to substantiate eligibility for credits claimed. Records should include documentation showing how the employer determined eligibility (e.g. government orders suspending operations, determination of more than nominal effect, or records supporting significant decline in gross receipts), detailed qualified wages by employee (in the case of a large eligible employer, work records and documentation showing wages were paid for time an employee was not providing services), allocable qualified health plan expenses, determination of aggregated group status and allocation of credit, and copies of any applicable forms claiming the credit.
- Prior 941 Amendment for eligible ERC Credits – Employers can file a claim for refund or an interest-free adjustment for prior employee retention credits by filing a Form 941-X for the relevant quarter when the employer paid qualified wages for the ERC.
Even with this additional IRS guidance, the relationship between PPP loan forgiveness and the Employee Retention Credit is complicated and potentially confusing. We urge employers to reach out to their Geffen Mesher tax professional for assistance in preparing your PPP loan forgiveness application or with reviewing your Employee Retention Credit eligibility.
Our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to help navigate this credit for your business and can be reached at SALT@gmco.com.