On March 1, 2021, the IRS issued Notice 2021-20 to provide additional guidance on the employee retention credit (ERC) as it applies to qualified wages paid after March 12, 2020 and before January 1, 2021. Future guidance is expected to be issued as it relates to qualified wages paid after January 1, 2021. The Notice utilizes a Q&A approach to addressing and illustrating its contents. A summary of the key takeaways is outlined below.
Aggregation Rules Applicable aggregation rules require members of a controlled group of corporations or trades or businesses under common control (as defined in various provisions of the Internal Revenue Code) are treated as a single employer for purposes of applying the employee retention credit rules in the following respects:
- Determining whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID-19 from an appropriate governmental authority;
- Determining whether the employer experiences a significant decline in gross receipts;
- Determining whether the employer averaged more than 100 full-time employees; and
- Determining the maximum credit amount per employee.
The amount of the employee retention credit with respect to a member of the aggregate group is based on the member’s proportionate share of the qualified wages giving rise to the credit for each calendar quarter for which the credit is claimed.
Governmental Orders Orders, proclamations or decrees from the federal government or any state or local government may be taken into account by an employer as “orders from an appropriate governmental authority” only if they limit “commerce, travel or group meetings (for commercial, social, religious or other purposes) due to (COVID-19)” and relate to the suspension of an employer’s operation of its trade or business.
Additionally, the declaration of a state of emergency by a governmental authority is not sufficient to rise to the level of a governmental order if it does not limit commerce, travel or group meetings in any manner. Further, such a declaration that limits commerce, travel or group meetings, but does so in a manner that does not relate to the suspension of an employer’s operation of its trade or business does not rise to the level of a governmental order for purposes of determining ERC eligibility. As such, examples of such government orders include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
- State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period;
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Full or Partial Suspension of Trade or Business Operation An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows all the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.
A business’ operations will be deemed to constitute more than a nominal portion of its business operations if either:
- The gross receipts from that portion of the business operations is not less than 10% of the total gross receipts (using the gross receipts from the same calendar quarter in 2019), or
- 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 in the employer’s business (using the number of hours of service performed by employees in the same calendar quarter in 2019).
An employer that suspends some or all of its operations because its customers are subject to a government order requiring them to stay at home or otherwise causing a reduction in demand for its products or services is not considered to have a full or partial suspension of its operations due to a governmental order. Likewise, an employer that voluntarily suspends operation of a trade or business or voluntarily reduces hours due to COVID-19 is not eligible for the ERC on the basis of a full or partial suspension of its operations.
If an employer’s workplace is closed by a governmental order, but the employer is able to continue operations comparable to its operations prior to the closure, including by requiring its employees to telework, the employer’s operations are not considered to have been fully or partially suspended as a consequence of a governmental order. However, if the closure of the workplace causes the employer to suspend business operations for certain purposes, but not others, it may be considered to have a partial suspension of operations due to the government order.
What factors should be considered in determining if an employer is able to continue operations comparable to its operations prior to closure:
- Employer’s telework capabilities. Determine whether an employer has adequate support (IT and otherwise) such that operations can continue via work from another location.
- Portability of employees’ work. Determine the amount of portable work, or work otherwise adaptable to be performed from a remote location, within an employer’s trade or business operations.
- Need for presence in employee’s physical work space. Evaluate the role that the employer’s physical work space plays in an employer’s trade or business (may be critical and necessary, beneficial but not necessary, or merely convenient). If the employer’s physical work space is so critical to its trade or business operations that tasks central to the trade or business’s operations are unable to be performed remotely, then this factor alone indicates that the employer is not able to continue comparable operations.
- Transitioning to telework operations. If an employer incurs a significant delay (for example, beyond two weeks) in moving operations to comparable telework (for example, implementing telework policies or providing employees with equipment to telework), then the employer’s trade or business operations may be deemed subject to a partial suspension during that transition period
If the operations of a trade or business of one member of an aggregated group are fully or partially suspended due to a governmental order then all members of that group that are treated as a single employer for ERC purposes are treated as fully or partially suspended, even if another member of the group is in a jurisdiction that is not subject to a government order.
Interaction with Paycheck Protection Program (PPP) Loans An eligible employer that received a PPP loan and was forgiven will need to exclude the amount of wages reported on the PPP Loan forgiveness application for purposes of the ERC. Wages reported on the PPP loan forgiveness application that are in excess of what is needed to obtain full loan forgiveness can still be used for purposes of the ERC.
By way of example, assume an employer borrowed $100,000 and had $150,000 of qualified wages and $40,000 of other PPP qualified expenses during 2020. On the forgiveness application, the taxpayer only listed wages for $150,000 (without reference or inclusion of the $40,000 non-payroll costs), the amount of ERC eligible wages would be $50,000 (that is the amount that was not required to obtain full forgiveness on their loan). The IRS guidance indicates that whether the employer could have listed other qualified expenses on their PPP loan forgiveness application to obtain full forgiveness is irrelevant.
Employers that have not yet applied for forgiveness, should consider the implication of utilizing other qualified expenses for purposes of forgiveness – other than wages.
Claiming the Employee Retention Credit The IRS guidance is consistent with the latest 941 Instructions and IRS FAQs. For employers claiming 2020 credits that had PPP loans that were or are expected to be forgiven, amended 941s should be filed for Q2-Q4 of 2020 to claim the respective ERC credits. Q1 credits can be claimed on a Q2 amended 941.
For employers that applied for loan forgiveness and have been denied, they can apply for 2020 credits on their Q4 amended 941.
Impact on Income Tax Filings – Income and Deduction An employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. (An employer does not, however, reduce its deduction for the employer’s share of social security and Medicare taxes by any portion of the credit).
Other Matters to Consider by Businesses that are expected to claim 2020 ERC Credits Because of the impact on federal and possible state income tax returns as a result of the reduction of qualified wages by the credit amount, consider filing an extension for 2020 tax returns until the applicable credit amount is determined, thus avoiding having to file an amended return.
Your professional team at Miller, Cooper & Co., Ltd. Is here to help you understand this new guidance. Please contact a member of your service team for additional guidance and assistance.