Six Steps to Sales Use ComplianceFebruary 18, 2021
[Video] The American Rescue Plan Act of 2021March 19, 2021
Valued Friends and Clients of WR,
On March 1st the IRS issued Notice 2021-20 which provides guidance for employers claiming the employee retention credit in 2020 and its interaction with PPP loans. While some of the 102 page notice restates information found in the IRS FAQs on the employee retention credit, there is clarification we’ve been waiting to see on how to handle wages already included on a submitted PPP forgiveness application that are also eligible for the employee retention credit. Below we discuss this interaction as well as review what constitutes a “governmental order” and a “nominal” portion of business and impact for the purposes of claiming the credit due to full or partial suspension of business operations. For basic information about the employee retention credit, please review our previous post or the IRS employee retention credit webpage.
ERC and Submitted PPP Forgiveness Applications
Prior to passage of the Consolidated Appropriations Act on December 27, 2020, businesses that received a PPP loan were not eligible to claim the employee retention credit. Many PPP borrowers had already filed their PPP loan forgiveness applications without considering the employee retention credit when the new legislation passed. As a result, most companies had exclusively included payroll costs in their forgiveness applications to make backup documentation less cumbersome, and included significantly more payroll costs in their applications than their loan amounts. After the CAA allowed these borrowers to potentially take the ERC if they qualified, but not to double dip PPP wages and ERC wages, the question was how do we reconcile the wages included in PPP forgiveness applications and employee retention credit wages.
This new guidance tells us that the amount of wages not eligible for the ERC is “the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven.” In other words, any payroll costs included on a PPP forgiveness application above the minimum amount needed to cover the loan forgiveness are eligible for the ERC. The notice includes several examples to illustrate this beginning on page 75. As you’ll see in these examples, borrowers can consider qualified costs other than payroll in determining the minimum amount of payroll required; however, a borrower cannot use any costs not already included on their submitted and approved forgiveness application. It appears forgiveness applications that have resulted in forgiven PPP loans already are not able to be modified for purposes of the ERC. These clarifications are welcomed as we are now in a better position to advise clients and assist in calculating and taking the ERC.
If you’ve been looking into the credit already, you are likely aware that wages paid when a business experiences a “full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19” may qualify for the ERC. This is a more subjective test than the decline in gross receipts test and we want to point out what the IRS considers a governmental order as this seems to be an area causing confusion. From the notice beginning on page 24:
Question: What “orders from an appropriate governmental authority” may be taken into account by an employer for purposes of determining eligibility for the employee retention credit?
Answer: Orders, proclamations, or decrees from the Federal government or any State or local government may be taken into account by an employer as “orders from an appropriate governmental authority” only if they limit “commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19)” and relate to the suspension of an employer’s operation of its trade or business. Orders that are not from the Federal government must be from a State or local government that has jurisdiction over the employer’s operations. These orders are referred to as “governmental orders.” Whether orders, proclamations or decrees are governmental orders is determined without regard to the level of enforcement of the governmental order. Statements from a governmental official, including comments made during press conferences or in interviews with the media, do not rise to the level of a governmental order for purposes of the employee retention credit. Additionally, the declaration of a state of emergency by a governmental authority is not sufficient to rise to the level of a governmental order if it does not limit commerce, travel, or group meetings in any manner. Further, such a declaration that limits commerce, travel, or group meetings, but does so in a manner that does not relate to the suspension of an employer’s operation of its trade or business does not rise to the level of a governmental order for purposes of the employer’s determination of its eligibility for the employee retention credit.
Governmental orders include:
An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period;
An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Whether the operations of a trade or business are considered essential or nonessential will often vary from jurisdiction to jurisdiction. An employer should determine whether it is operating an essential or non-essential business by referring to the governmental order affecting the employer’s operation of its trade or business.
It is important to note that an employer that voluntarily suspends operations (fully or partially) not subject to any government order that restricts its operations is not eligible for the credit on the basis of full or partial suspension.
“Nominal” Clarified for Business Operations and Impact
Nominal Portion of Business: The IRS FAQs included language that employers may qualify for the ERC if they have a partial suspension of operations that is more than a “nominal portion of its business” and due to a government order. The notice provides clarification that a portion of the business that makes up 10% of a business’s gross receipts or 10% of the total number of hours of service performed by the employer’s employees is deemed to be more than nominal. Essentially this provides a safe harbor for treating a portion of a business as more than nominal, and if not using that safe harbor, a facts and circumstances general rule still applies to determine what is nominal.
Comparable Operations: In the IRS FAQs and in the notice, employers that are able to continue comparable operations even though they were subject to government orders, are not considered to be fully or partially suspended by government orders. The notice added factors to determine whether operations are considered to be comparable to operations prior to closure including telework capabilities, the amount of portable work, the role of the physical work space, and the transition time to be able to telework (with transitions longer than two weeks being considered significant).
Nominal Impact: The notice also adds factors to consider whether modifications have more than a nominal effect. Those factors include limited occupancy, appointment-only services that previously offered walk-ins, restrictions on certain services such as buffets or requiring face coverings. Although these modifications are listed as examples, facts and circumstances still apply to determine whether they have more than a nominal impact. Similar to above, a 10% impact on the ability to provide services is deemed to be more than nominal as a safe harbor.
The notice provides that employers should maintain adequate records for at least four years to support credits claimed including documentation showing eligibility (e.g. orders that suspended operations, records supporting more than nominal impacts or proof of gross receipts levels), records of qualified wages by employee (including support for time not working for large employers), allocable qualified health plan expenses, determination of aggregated group status and copies of any applicable forms claiming the credit.
We are here to help you through this process and are happy to discuss your specific situation to help you decide your best path forward. Reach out to your WR Partner or your relationship manager. You can also email our COVID-19 task force for assistance.
In case you missed any of our previous updates, you can find them all posted on the News Updates page of our website.
Check out our Resource Library for online video content.