New IRS guidance for the ERC credit
The employer retention credit (ERC) was designed to aid businesses who retained their employees during the pandemic by providing substantial tax credits. The credit for 2020 is equal to 50% of qualified wages paid, including qualified health plan expenses, up to $10,000 per employee. Consequently, the maximum credit available for each employee is $5,000.
You are a qualified employer if you were ordered to fully or partially shut down or if your gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021). If you were not in business in 2019, then you could use the corresponding quarters from 2020.
The IRS recently provided detailed guidance for employers claiming the employee retention credit (ERC) for calendar quarters in 2020.
The IRS says the guidance in the notice is similar to the information it posted in FAQs last year, but the notice clarifies and describes retroactive changes under the new law that apply to 2020. The guidance primarily relates to expanded eligibility for the credit for taxpayers who took Paycheck Protection Program (PPP) loans.
For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before Jan. 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts.
The American Institute of Certified Public Accountants (AICPA) requested more guidance from the IRS and recommended that the filing of a PPP loan forgiveness application should not constitute an election to forgo the employee retention credit with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.
Eligible employers that received a PPP loan are permitted to claim the employee retention credit, although the same wages cannot be counted for both for 2020. Notice 2021-20 explains in detail when and how employers that received a PPP loan can claim the employee retention credit for 2020.
The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.
The employee retention credit can provide a substantial tax credit if you retained employees during the pandemic.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org