In response to uncertainty about the implementation of the employee retention tax credit (the “ERTC”) following a variety of revisions to the ERTC since its creation under the CARES Act, the Internal Revenue Service (“IRS”) issued Notice 2021-20 providing guidance regarding the ERTC.
The ERTC was created by the CARES Act in March of 2020. Initially, it provided a tax credit equal to 50% of the “qualified wages” paid to an employee up to $10,000 per calendar quarter. Under the CARES Act, businesses were only eligible for the ERTC if they were an “eligible employer,” meaning that such business either (i) was required by a governmental authority to fully or partially suspend its trade or business because of COVID-19 or (ii) experienced a significant decline in gross receipts, which was defined as decline of greater than 50% in any 2020 calendar quarter as compared to the same calendar quarter in 2019.
Then, in December of 2020, the Relief Act amended the ERTC portion of the CARES Act. The Relief Act made a series of significant changes. It extended the ERTC for “qualified wages” paid on or after January 1, 2021 until June 30, 2021. The amount of credit was increased to 70% of “qualified wages” paid to an employee up to $10,000 per calendar quarter. The threshold for the decline in gross receipts to qualify as an “eligible employer” was reduced to 20% from 50%. It also allowed businesses to claim both the ERTC and receive a Paycheck Protection Program (“PPP”) loan as provided for in the CARES Act.
The changes to the Relief Act created some additional confusion, and still didn’t address some existing portions of the ERTC that had also caused confusion. As such, in March of 2021, the IRS issued Notice 2021-20 to clarify and consolidate into one location the current rules related to the operation of the ERTC. It is important to note that IRS Notice 2021-20 only applies to wages paid from March 12, 2020, through January 1, 2021. Below is a summary of the most notable portions of the voluminous Notice 2021-20.
Notice 2021-20 provides clarity around what constitutes full or partial government shutdowns that allows taxpayers that do not meet the gross receipts reduction test to still claim the ERTC. Notice 2021- provides that in order to meet the shutdown test, government orders must have a “more than nominal” effect on the business operations. A portion of the taxpayer’s business operations will be deemed to constitute more than a nominal portion if either (i) the gross receipts from that portion of the business operations is not less than 10% of the business’s total gross receipts, or (ii) the hours of service performed by employees in that portion of the business is not less than 10% of the total number of hours of service performed by all employees.
Notice 2021-20 clarifies that an employer that received a PPP loan may claim the ERTC for any “qualified wages” if the employer is an “eligible employer” that meets the requirements for the ERTC, although the same wages cannot be counted for both the PPP loan and ERTC. It also provides that an eligible employer may elect not to take certain qualified wages into account for purposes of the ERTC by not claiming those credits on its employment tax return, such as for purposes of including such wages as payroll costs for purposes of PPP loan forgiveness. Further, an employer is deemed to have made such an election if such qualified wages are included in an application for PPP loan forgiveness.
Notice 2021-20 provides that if multiple entities are treated as a single employer under the ERTC aggregation rules, each entity will report its ERTC on its separate federal employment tax return without regard to its aggregation with other entities.
It also clarifies that an eligible employer may use a special fourth quarter rule provided in the Relief Act. The special fourth quarter rule provides that if an employer received a PPP loan and reported qualified wages paid in the second and/or third quarter of 2020 as payroll costs associated with its PPP loan, but the loan was not forgiven, then the eligible employer may take those qualified wages into account for its ERTC calculation for the fourth quarter of 2020.
Notice 2021 -20 provides that the ERTC reduces the expenses that an eligible employer could otherwise deduct on its federal income tax return pursuant to Section 280C(a) of the Internal Revenue Code of 1986, as amended (the “Code”).
Here is a link to the IRS Notice 2021-20.
If you have any questions or need any assistance with using the ERTC for your business, please don’t hesitate to contact Kemp Klein.
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