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The IRS has released guidance for employers claiming the employee retention credit, clarifying retroactive changes that have been made for the 2020 tax year and how these affect employers who received Paycheck Protection Program (PPP) loans.
The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a refundable 50% payroll tax credit for up to $10,000 in wages for employers whose businesses partly or completely shut down, or had faced a significant decline in gross receipts, between March 12, 2020 and before Jan. 1, 2021.
Although PPP loan recipients originally were ineligible for the credit under the CARES Act signed last March, the subsequent Taxpayer Certainty and Disaster Tax Relief Act of 2020 signed in December amended the CARES Act to strike that provision. The IRS guidance issued on Monday sought to clarify this and other eligibility expansions.
“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,” the IRS said.
“Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020,” the IRS said.
An employer can receive the credit for qualified wages by reporting the amounts on the designated lines of its federal employment tax returns, the IRS notice stated. However, payroll costs that were paid for and forgiven with PPP loans are not qualifying wages for purposes of the employee retention credit, the IRS said.
The notice also provides answers to questions such as: who is an eligible employer; what constitutes full or partial suspension of trade or business operations; what is a significant decline in gross receipts; how much is the maximum amount of an eligible employer’s employee retention credit; what are qualified wages; how does an eligible employer claim the employee retention credit; and how does an eligible employer substantiate the claim for the credit.
While the Relief Act that was signed in December also extended and modified the employee retention credit for the first two quarters of 2021, Notice 2021-20 addresses only the IRS rules applicable to the 2020 tax year. The IRS said it plans to release additional guidance in the future addressing the changes for 2021.
Further information about Notice 2021-20 can be found on the IRS website.