On March 2, 2021, the U.S. Department of the Treasury (Treasury) and IRS released Notice 2021-20 (Notice), which provides guidance on the Employee Retention Credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES). The ERC is a refundable payroll tax credit for employers who experienced either
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel , or group meetings due to COVID-19 or
- a significant decline in gross receipts by quarter compared to the same quarter of 2019. For 2020 a significant decline in gross receipts is defined as 50% or more and for 2021 a significant decline in gross receipts is defined as 20% or more.
Prior to the issuance of this Notice, the only IRS guidance on the Employee Retention Credit was in the form of frequently asked questions (FAQ) on the IRS website. The Notice replicates most of these FAQs, making it authoritative guidance for taxpayers, and provides additional guidance, including the interaction of the ERC with the Paycheck Protection Program (PPP).
Under the 2021 Consolidated Appropriations Act (CAA), employers that received a PPP loan are now eligible for the ERC. However, employers cannot “double-dip” and use the same wages for both PPP loan forgiveness and the ERC. Employers that already submitted a PPP loan forgiveness application prior to the passage of the CAA faced uncertainty to the extent the forgiveness application reported ERC-eligible payroll costs in excess of the amount needed to receive full loan forgiveness. Question 49 in the Notice provides guidance on the interaction with PPP loans, including several examples.
Determining ERC Eligibility Based on Government Orders
An employer whose trade or business operations are fully or partially suspended due to a governmental order is eligible for the ERC. 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. So there are 2 ways to qualify for the ERC.
Question 11 in the Notice introduces a new objective test in evaluating whether a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its operations for purposes of the ERC.
The notice also provides a list of factors to consider when determining if an employer can continue comparable operations, such that it would not be considered to have a full or partial suspension. This list of factors includes telework capabilities, portability of the employee’s work, how critical an employer’s workspace is to its trade or business, and whether the employer incurred a significant delay, e.g., more than two weeks, in moving operations to a remote environment.
Please note: the IRS is expected to issue guidance on the 2021 ERC in the near future and we will provide that information once it comes out.
If you have questions about your ERC eligibility, or any COVID-related questions, please contact your HW&Co. advisor.