IRS Provides Guidance for Employers Claiming the Employee Retention Credit for 2020, Including Eligibility Rules for PPP Borrowers
The IRS recently issued Notice 2021-20, providing guidance for employers claiming the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), for calendar quarters in 2020. The guidance is similar to the information in the employee retention credit FAQs but includes clarifications and retroactive changes under the new law applicable to 2020, primarily relating to expanded eligibility.
For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020 and before January 1, 2021 and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.
A significant change for 2020 made by the Relief Act permits eligible employers that received a Paycheck Protection Program (PPP) loan to claim the employee retention credit, although the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit. Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020.
The notice also clarifies issues such as: who eligible employers are; what constitutes full or partial suspension of trade or business operations; what a significant decline in gross receipts is; how much the maximum amount of an eligible employer’s employee retention credit is; what qualified wages are; how an eligible employer claims the credit; and how an eligible employer substantiates the claim for the credit.
While the Relief Act also extended and modified the employee retention credit for the first two calendar quarters in 2021, Notice 2021-20 addresses only the rules applicable to 2020. The IRS plans to release additional guidance soon addressing the changes for 2021.