On March 1, 2021, the IRS released Notice 2021-20, which provides authoritative guidance for employers who are claiming the 2020 Employee Retention Credit (“ERC”), recently made available to all Paycheck Protection Program (“PPP”) borrowers. Much of this information was previously released as Frequently Asked Questions, posted on the IRS website in 2020.
PPP Loan Forgiveness and ERC
Because PPP borrowers only became eligible to claim the ERC on December 27, 2020, and ERC Qualified Wages cannot be used for PPP loan forgiveness, the Notice explains which payroll costs included on the PPP loan forgiveness application may be used as ERC Qualified Wages.
In general, any amount of payroll costs included on the PPP loan forgiveness application that are not needed for loan forgiveness can be used as ERC Qualified Wages by an ERC Eligible Employer (i.e., one satisfying either the government mandate or the significant decline in gross receipts test). However, amounts not included on the PPP loan forgiveness application that could have been included (e.g., rent expenses, utilities) cannot be considered for PPP loan forgiveness.
If a PPP loan borrower submits only payroll costs on the PPP loan forgiveness application and does not include rent or utility costs that could have been included, those rent and utility costs cannot be considered for PPP loan forgiveness. In addition, it is important that the rule requiring payroll costs to constitute at least 60 percent of PPP loan forgiveness costs be met in determining payroll costs needed for the PPP loan forgiveness and not available to be ERC Qualified Wages.
Partial Suspension of Operations
The Notice also clarifies other issues, particularly in determining if a government order limiting commerce, travel or group meetings due to COVID-19 results in a partial suspension of business operations. A taxpayer becomes an Eligible Employer if the trade or business suspended constitutes more than a nominal portion of business operations.
The Notice defines nominal portion to be a portion which is 10 percent or less of the total gross receipts of the business; or uses 10 percent or less of the hours of service performed by employees in the business. Both of these calculations are performed based on facts for the same quarter in 2019 as the quarter in 2020 to which the mandate applies.
The Notice also details factors that should be considered in determining whether an employer is able to continue operations (such that the employer’s operations are not considered to be fully or partially suspended). Those factors include:
- The employer’s telework capabilities
- The portability of an employee’s work
- The need for presence in the employee’s physical workspace
- The time spent on transitioning to teleworking operations
Thus, if an employee’s work can be done from any location and the employer has adequate telework capabilities, it is unlikely that a full or partial suspension has occurred as a result of a government mandate. However, if the employer’s workspace is so critical to its trade or business operations that tasks cannot be performed remotely, then comparable operation of the trade or business might not be possible and a suspension of the business may have occurred.
For example, a caterer whose operations are not suspended due to a government mandate may have a partial suspension if the workspace of the caterer has been closed due to a government mandate. Similarly, a government contractor with employees who normally work in a workspace closed due to a government order may have a suspension of operations if the consultant’s work cannot be done remotely.
Sometimes an employer’s operations are modified due to a government order involving occupancy restrictions. The Notice states that a government order resulting in a 10 percent or more reduction in the employer’s ability to provide its goods or services will be deemed to have more than a nominal effect on the employer’s operations.
The Gross Receipts Test
The Notice explains that gross receipts for both taxable and tax-exempt entities are based on the employer’s method of accounting. For entities other than tax-exempt organizations, this would include tax-exempt income. The guidance does not exclude the forgiveness of a PPP loan or other federal or state government grants to businesses from gross receipts. It appears that such amounts must be included in gross receipts. For tax-exempt entities, the Notice focuses on amounts received and appears to exclude pledges, but include restricted funds, whether cash or noncash. The guidance is not specific on any of these items.
Third Party Payroll Providers
The Notice makes clear that the common law employer is eligible to claim the credit, even though wages are paid by a Certified Professional Employer Organization (“CPEO”) or an agent of the employer designated as such on a Form 2678, Employer/Payer Appointment of Agent. The employer can claim the credit by filing a Form 7200. This form is then provided to the CPEO or agent to properly report on its quarterly Form 941, including Schedule R.
If the common law employer uses a non-certified Professional Employer Organization or agent other than one designated on Form 2678 to report the common law employer client’s federal employment taxes under the third party’s Employer Identification Number (“EIN”), the same procedures apply, although the non-certified PEO or agent other than one designated on Form 2678, will need to separately report the ERC for the common law employer included on an aggregate employment tax filing on an accompanying Schedule R. A Schedule R is not included for any employer not claiming an ERC.
The Form 7200 can also be submitted for a common law employer by a payroll reporting agent, if the payroll agent receives written authorization to do so from its common law employer client.
Third parties claiming the ERC for the common law employer customer can rely on information provided by the common law employer to claim the credit, but are liable, along with the common law employer, for employment taxes due as a result of an improperly claimed credit.
Claiming the Credit
For 2020 credits, a Form 941-X needs to be filed and a check should be requested from the IRS. This can be done any time before the statute of limitations for 2020 employment tax returns expires, unless extended by the taxpayer, on April 15, 2024.
For 2021 credits, cash is available immediately by reducing income and employment tax deposits, including federal income and employment tax withholding for all employees and the payment of the employer’s share of employment taxes, for the anticipated ERC amount. This is the fastest way to claim the credit and is the IRS recommended approach.
If the total payroll tax deposits are less than the anticipated credit, a Form 7200 can be used to apply for an advanced payment of the ERC. The amount of the advance may not exceed 70 percent of the average quarterly wages paid in 2019. This form can be filed at any time before the Form 941 for the quarter is filed and more than one Form 7200 can be filed during any quarter. The Form 7200 and the payroll tax deposits will be reconciled on the quarterly employment tax return.
The benefit of reducing payroll tax deposits and filing Form 7200 is that cash is available faster than upon filing the quarterly employment tax return. The IRS will not assess late payment penalties or interest as long as the advanced ERC is not in excess of the allowable ERC.
Cherry Bekaert welcomes the opportunity to assist you in claiming the ERC. We have a proprietary technology platform that allows us to provide an audit-ready deliverable in which we document your status as an Eligible Employer, calculate the credit from your wage data, maximize the wages treated as Qualified Wages, and allocate PPP loan forgiveness proceeds across the eligible payroll quarters. For questions or guidance, contact your Cherry Bekaert tax advisor or email EmployeeRC@cbh.com.
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