The Internal Revenue Service (IRS) recently issued Notice 2021-20 which provides guidance for employers claiming the Employee Retention Tax Credit (ERTC). The Notice incorporates much of the informal guidance issued by the IRS previously, but adds a number of new items. Here are the key takeaways for Notice 2021-20:
1. The Notice provides definitions, procedural guidance, and modifications to the original 83 FAQs through 71 Q&As.
2. There are two main pathways for credit entitlement. One is under the mechanical “gross receipts” reduction test, and the other is under a more imprecise facts and circumstances test that looks at whether there was a “partial or full shutdown” in any quarter resulting from a governmental order. The gross receipts test was eased in the December 2020 legislation for 2021, but the facts and circumstances, partial or full shutdown test remain unchanged. Notice 2021-20 addresses a number of issues regarding a partial, or full shutdown:
- Essential businesses that could continue to operate under governmental orders are generally ineligible under the partial shutdown criteria, but can qualify if their suppliers were affected by governmental orders, and supply difficulties caused the business to have a partial shutdown. The Notice failed to address the possible eligibility of essential businesses whose third-party customers were shut down or limited by government orders, but strong arguments can be made for ERTC entitlement.
- Internal Revenue Code section 414 aggregation rules are used to determine the scope of the affected business, and whether a partial shutdown of any part of an aggregated business is treated as the partial shutdown of the entire aggregated group.
– The affected business must be more than a nominal part of the overall, aggregated business. Under a safe harbor, any businesses that are accounted for 10% of the business’s gross receipts in the corresponding quarter in 2019 falls outside the “nominal” category.
– Government orders requiring business operating accommodations (social distancing, patron number limits, appointment-only availability, changed format of service (e.g., carryout)) can be the basis for a partial suspension of business if the accommodation affects the business more than nominally. A government order that results in the employer’s inability to provide goods and services of at least 10% is deemed to have more than a nominal effect. The effects of customer and employee mask requirements on business operations cannot be taken into account.
- Businesses able to continue comparable operations, in spite of a governmental order do not qualify under the shutdown criteria. The Notice clarifies the critical factors involved – employee telework capabilities, portability of work, and the need for presence in the workspace. A temporary slowdown because of a transition to telework is not considered to be a partial shutdown.
- For an aggregated group, the $10,000 tax credit is allocated to the different members of the group if an individual is employed and paid by more than one member of the aggregated group
3. The Notice is the first IRS articulation of how the PPP loan rules coordinate with the ERTC. The original tax credit rule was modified in the December 2020 legislation to clarify that a taxpayer would claim the ERTC even if the taxpayer (or someone in the aggregated group) had received a PPP loan.
Under the modification, wage payments cannot be claimed for entitlement to the ERTC if the same wages were also reported on the PPP loan forgiveness application as payroll costs paid for the forgiven PPP loan. The Notice explains how payroll and other business expenses paid before by the PPP loan are allocated if the total qualifying expenses exceeded the PPP loan.
4. Many taxpayers did not claim the ERTC in 2020 under the belief that they were ineligible because of the PPP loan. The Notice explains how a Form 941-X can be used to claim a credit retroactively.
Please contact your Mazars tax professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on April 8, 2021
Authored by Ryan Vaughan with Ivins, Phillips & Barker, Chtd.