IRS clarifies legislative changes to employee retention tax credit
In response to the uncertainty surrounding the implementation of the Employee Retention Tax Credit (the “ERTC”) following various revisions to the ERTC since its inception under the Act on help, relief and economic security from coronavirus, Internal Revenue Service (“IRS”)) Posted Notice 2021-20 provide advice regarding the ERTC. Importantly, despite the fact that the ERTC, as amended by the Taxpayer Certainty and Disaster Tax Relief Act (the “Relief Act”), applies to wages paid after the March 12, 2020 and before January 1, 2021, as well as to salaries paid from January 1, 2021, notice 2021-20 only applies to ERTCs applicable to salaries paid after March 12, 2020 and before January 1, 2021 The IRS says it will provide separate guidance for the ERTCs applicable to wages paid after January 1, 2021.
Context of the ERTC
The ERTC enacted under the CARES Act provided for a tax credit equal to 50% of “eligible wages” paid to an employee up to a maximum of $ 10,000 per calendar quarter. Under the CARES Act, businesses were only eligible for the ERTC if they were an “eligible employer”, meaning that that business (i) was required by a government authority to totally or partially suspend its business activity due to COVID-19 or (ii) experienced a significant decrease in gross revenue, which was defined as a decrease of more than 50% in any calendar quarter of 2020 compared to the same calendar quarter in 2019.
In the months following the creation of the ERTC under the CARES Act, the IRS issued and regularly updated guidance relating to the ERTC in the form of FAQs posted on the IRS website. However, these FAQs have not yet been updated to reflect the most recent changes to the ERTC and the FAQs were not binding.
As we have seen previously, the Relief Act amended the ERTC. More specifically, the Relief Act amended the ERTC in the following four ways:
- He extended the ERTC for “qualified salaries” paid from January 1, 2021 until June 30, 2021.
- The amount of the credit has been increased to 70% of the “eligible salary” paid to an employee up to a maximum of $ 10,000 per calendar quarter.
- The threshold for declining gross receipts to be considered an “eligible employer” has been reduced from 50% to 20%.
- It allows businesses to both claim the ERTC and receive a Paycheck Protection Program (“PPP”) loan as required by the CARES Act.
Due to the many changes to the operation of the ERTC contained in various legislative texts, IRS FAQs and other IRS publications, the IRS has issued Notice 2021-20 to synthesize and consolidate into one place the current rules related to the operation of the ERTC.
Clarification provided in Notice 2021-20
Rather than providing new legal authority, Notice 2021-20, which binds the IRS unlike FAQs, summarizes existing legal authority and provides question-and-answer guidance on how the ERTC works in this regard. which concerns wages paid after March 12. , 2020 and before January 2, 2021. The following guidance provided in Notice 2021-20 differs from the existing IRS FAQs:
- It specifies that an employer who has received a PPP loan can claim the ERTC for any “eligible salary” if the employer is an “eligible employer” who meets the requirements of the ERTC, although the same salary cannot. be counted for both PPP and ERTC loan.
- It provides that an eligible employer may choose to disregard certain eligible wages for the purposes of the ERTC by not claiming these credits on their employment income tax return, for example for the purpose of including those wages in the salary costs for the purpose of canceling PPP loans. In addition, an employer is deemed to have made such an election if these eligible wages are included in a request for a PPP loan forgiveness.
- It 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 income tax return regardless of its aggregation with other entities.
- It specifies that an eligible employer can use a special fourth quarter rule provided for in the Relief Act. The fourth quarter special rule provides that if an employer received a PPP loan and reported eligible wages paid in the second and / or third quarter of 2020 as salary costs associated with their PPP loan, but the loan was not canceled, the eligible employer may take these qualified salaries into account for their ERTC calculation for the fourth quarter of 2020.
- It provides that the ERTC reduces expenses that an eligible employer might otherwise deduct on its federal income tax return in accordance with Section 280C (a) of the Internal Revenue Code of 1986, as amended (the “Code”). .
In addition to the specific questions discussed above, the notice includes a total of 71 questions and answers related to a variety of ERTC-related issues.