IRS Issues Guidance on 2020 Employee Retention Credit

From McKonly & Asbury, CPAs & Business Advisors

The IRS recently released Notice 2021-20 regarding the Employee Retention Credit. For the most part, it mimics the FAQs that have been up for months. However, there are some additional details from the original FAQs.

In 2020, employers could not take advantage of the ERC and PPP. Now, employers can utilize both. Previously, the most effective and efficient thing to do to get full PPP forgiveness was to utilize payroll over the entire 24-week covered period. Now that employers can take both the PPP and the ERC (just not on the same payroll), everything changed. Now employers will want to minimize payroll and get full forgiveness. That frees up max payroll for ERC. The most recent guidance stipulates that any payroll costs on the application for forgiveness are already spoken for – meaning no ERC – but only to the extent that they were needed for forgiveness. So, if a business had a $75k PPP loan, and included $100k of payroll costs on the forgiveness application as a buffer, only $75k is ineligible. Also, if there are other eligible costs on the application, they can offset how much payroll is already spoken for.

Next big area is how to claim the credit. Employers will need to amend all 2020 941s, splitting out payroll costs by quarter and refiling 941s.

The final item of consequence was the introduction of a “nominal” portion of business and how to determine that. This relates to the at least partial suspension of business. The rules state that one way to qualify for the ERC is if a business was at least partially shut down by a governmental mandate. The IRS is saying that if a business wasn’t completely shut down, the partial shut down must affect a portion of your business that is more than “nominal” (10% of revenue, or 10% of hours). Most businesses aren’t neatly organized into revenue and hours one way vs another way, so a shut down of one or the other isn’t always easy to quantify. An clear example is the restaurant industry and the shut down or limitation of indoor dining. Clearly, indoor dining is more than a nominal portion of a restaurant’s business. Tracking for a service provider is not as clear cut.

The team at McKonly & Asbury is eager to work with any employer that needs assistance. Visit their ERC page and someone will be in contact.