The IRS has offered new guidance and formalized informal guidance (Notice 2021-20) for employers claiming the employee retention credit (ERC) for calendar quarters in 2020. The refundable credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings, or that satisfy a reduced gross receipts test.
Notice 2021-20 is primarily in a Q&A format and many items within the notice are similar to the information in the previously published IRS ERC FAQs. The notice does include clarifications and describes retroactive changes under the new law that are applicable to 2020, primarily relating to expanded eligibility for the credit.
One change addressed by Notice 2021-20 relates to eligible employers that received a Paycheck Protection Program (PPP) loan and have become, under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), newly eligible to claim the ERC. The same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the ERC. Notice 2021-20 provides additional detail on how qualified wages are determined for purposes of the ERC when an employer that received a PPP loan asks for forgiveness of the loan, and it confirms that the costs the taxpayer assigns for the forgiveness application can affect the wages available for credits.
Notice 2021-20 also provides insight into some areas not fully addressed by the IRS FAQs such as what constitutes a “nominal” portion of an employer’s business for purposes of qualifying for the credit.
Notice 2021-20 addresses only the rules applicable to ERC for calendar quarters in 2020. The IRS indicated that it plans to release additional guidance addressing the changes to the ERC for 2021, including those made by TCDTRA and the American Rescue Plan Act of 2021, which was recently signed into law.
By publishing the 2020 ERC guidance in the form of a notice, employers can now rely on the guidance for penalty protection purposes. FAQs published only on the IRS’s website are considered informal guidance that is not binding on the IRS and cannot be relied on by employers.
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