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Credit Where Credit Is Due: IRS Offers Long-Sought Guidance on Employer Retention Credit Program

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As we previously reported, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provided for an employee retention credit (“ERC”) designed to encourage employers to retain workers during the COVID-19 crisis.  In general, the ERC permits eligible employers to claim a refundable tax credit of a portion of qualified wages paid to employees over a given period.

Initially, the IRS issued guidance on ERCs in the form of online Frequently Asked Questions (the “FAQs”).  The FAQs were non-binding and subject to change.  As of March 1, 2021, the IRS published formal rules with respect to ERCs in Notice 2021-20 (the “Notice”).  The Notice reflects important changes made to the ERC program by the Consolidated Appropriations Act (the “CAA”) and offers long-sought clarity to eligible employers.  A high-level summary of the Notice follows below.

  • Questions 1 – 28 address eligibility considerations.  In particular, the Notice clarifies which trades and businesses are eligible to receive an ERC, how businesses should be aggregated for purposes of the ERC, and how to determine whether a business experienced a suspension of operations or a decline in gross receipts.
  • Questions 29 – 48 establish the maximum credit available to eligible employers and identify qualified wages and qualified health plan expenses for this purpose.
  • Question 49 deals with the interaction between the Paycheck Protection Program (“PPP”) and ERCs.  Under the CARES Act, employers that received funding from the PPP were not allowed to claim an ERC.  However, the CAA repealed this restriction retroactively and permits employers that received a PPP loan in 2020 to apply for ERCs.  The Notice reflects this updated eligibility provision and clarifies that the credit may not be claimed for wages that were paid with the proceeds of a PPP loan that has been forgiven.  Additional guidance for PPP loans received in 2021 is forthcoming.
  • Questions 50 – 58 describe the mechanics of claiming the ERC for eligible employers.
  • Questions 59 – 71 provide guidance on miscellaneous issues, including income and deduction calculation, the treatment of third-party payers, and the documents that should be retained to substantiate a request for an ERC.

The full text of the Notice can be found here.  Note that the earlier FAQs have not yet been updated to reflect the terms of the CAA or the Notice and, accordingly, should be applied with caution.