Navigating Evolving Guidance: IRS Notice 2021-20 on Employee Retention Tax Credits

The COVID-19 pandemic sparked the rapid deployment of crucial business tax relief measures like the Employee Retention Tax Credit (ERTC). As a new program, interpretations, and requirements have continued to evolve through ongoing IRS guidance.

Notice 2021-20, released in March 2021, provides important new and clarified ERTC rules that employers need to understand. This in-depth article examines key provisions in Notice 2021-20 and how employers should apply the guidance when seeking these valuable credits.

We’ll cover coordinated use with PPP loans, clarified eligibility criteria, qualified wage updates, amended return procedures, aggregation rules, and more. Thoroughly incorporating Notice 2021-20 protects compliance and maximizes relief potential.

Background on the Employee Retention Tax Credit

The ERTC assists employers with retaining employees through pandemic challenges. Originally authorized by the CARES Act, key provisions include:

  • Refundable tax credit claimed on payroll tax returns based on keeping employees
  • 50% credit on qualified wages up to $10,000 per employee for 2020
  • Eligibility if operations fully/partially suspended due to governmental COVID-19 orders or gross receipts declined by more than 50%
  • Provides up to $5,000 per employee in 2020

Subsequent legislation expanded provisions for 2021. The credit remains in effect through December 31, 2021.

Overriding Purpose of Notice 2021-20

The IRS recognizes the ERTC’s crucial role in helping employers navigate COVID-19 challenges. Notice 2021-20 aims to:

  • Provide certainty for employers on time-sensitive issues
  • Clarify common eligibility and computation questions
  • Enable employers to quickly and confidently claim credits
  • Ensure eligibility requirements are applied uniformly
  • Prevent duplicate benefit claims under coordinating programs
  • Outline proper substantiation needed to support claims

This guidance allows for maximizing relief while maintaining compliance.

Key Provisions in IRS Notice 2021-20

Notice 2021-20 contains important guidance across multiple facets of the credit. Key provisions include:

Coordinating with Paycheck Protection Program (PPP) Loans

  • Employers can claim ERTC for qualified wages not paid with forgiven PPP loan proceeds
  • Requires tracking wages separately between programs
  • Applies to new and retroactive ERTC claims after PPP forgiveness

Clarified Operating Rules for Eligibility

  • Provides definitive guidance on measuring declines and disruptions
  • Allows aggregation across commonly controlled entities

Qualified Wage Clarifications

  • Defines payroll costs eligible as qualified wages
  • Allows inclusion of qualified health plan expenses
  • Addresses treatment of tipped workers

Amended Return Guidance

  • Permits retroactive claim of ERTC back to enactment date
  • Requires detailed explanation of adjustments on amended returns

Substantiating Credit Claims

  • Mandates retaining computations, calendars, descriptions of operations
  • Recommends supporting eligibility with common documents

The following sections examine these provisions in greater detail.

Coordinating ERTC and PPP Forgiveness

A key focus of Notice 2021-20 is providing guidance on coordinating ERTC with Paycheck Protection Program forgiveness, including:

  • Employers that received a PPP loan can still qualify for ERTC for periods outside their PPP-covered period.
  • For periods within the PPP covered period, the employer can claim ERTC on payroll costs that are not qualified wages under PPP. This may include, for example, qualified wages paid to employees not considered employees under PPP rules.
  • Employers cannot claim a double tax benefit on the same wages using both PPP and ERTC.
  • Applies both original and amended returns. If an employer already filed claiming ERTC, it can amend to coordinate with PPP and claim additional amounts retroactively.
  • Requires detailed tracking of wages allocated to each program and how amounts were computed.

This crucially enables tapping both programs to optimize relief.

Clarifications on Operating Rules

The notice also clarifies certain operating rules for meeting eligibility thresholds, including:

Gross Receipts Decline Option:

  • Can compare the current quarter to either the same quarter in 2019 or the immediately preceding quarter.
  • Allows aggregation across all entities in a controlled or affiliated group.
  • Defines gross receipts consistently with how calculated historically on tax returns.

Partial Suspension Option:

  • A partial suspension of operations must be more than a nominal reduction. Facts and circumstances determine materiality.
  • A reduction in gross receipts of 10% was used as a reasonable threshold for partial suspensions.
  • Aggregation is permitted to meet suspension rules also.

These provisions offer more flexibility in qualifying and documenting eligible quarters.

Qualified Wage Updates and Clarifications

Additional ERTC computation guidance is provided regarding qualified wages:

  • For PPP recipients, qualified wages are generally payroll costs not able to be covered by loan forgiveness.
  • Qualified wages include certain group health plan expenses properly allocable to those amounts.
  • For tipped workers, employers can include reported tips in qualified wages up to statutory limits.
  • Qualified wages are capped at $10,000 on a per-employee per-quarter basis for 2021.

Properly applying limits and inclusions prevents understating eligible credit amounts.

Amended Return Filing Guidance

To enable broader retroactive relief, the notice affirms:

  • Employers can file original or amended returns to claim ERTC back to the credit’s effective date.
  • Amended returns claiming newly available ERTC after PPP forgiveness must include a detailed explanation of the adjustment and provide supporting documentation.
  • Failure to provide sufficient explanatory detail and documentation risks delay or denial of amended refund claims.

These procedures facilitate fuller retrospective access but require meticulous support.

Substantiating Eligibility and Credit Amounts

To reinforce proper compliance, the notice mandates the retention of:

  • Computations related to determining gross receipts declines and suspensions, including aggregations across entities
  • Any applicable calendar quarter or alternative quarter election details
  • Descriptions of usual business operations and how activities were specifically impacted by COVID-19 disruptions

Recommended documents to further support eligibility and credit amounts include:

  • Governmental orders limiting operations
  • Organizational charts identifying aggregated entities
  • Quarterly financial statements evidencing revenue declines
  • Payroll records documenting wages by employee
  • PPP loan documentation and coordination schedules

Preserving appropriate substantiation remains imperative when claiming ERTC.

Incorporating Updated Guidance

Employers claiming ERTC must diligently integrate new Notice 2021-20 provisions on coordination with PPP, suspensions, declines, qualified wage definitions, amended return procedures, and required documentation.

Key steps include:

  • Reviewing guidance sections applicable to your circumstances
  • Adjusting computations and eligibility criteria definitions as warranted
  • Recalculating qualified wage amounts per updated rules
  • Amending past returns if newly eligible amounts identified
  • Enhancing documentation retention practices per notice
  • Strengthening controls and protocols around the claiming process
  • Training team members on applicable updated provisions
  • Consulting advisors to ensure full compliance

Proper execution safeguards relief potential.

Why Notice 2021-20 Matters

Evolving interpretations and clarifications in IRS guidance serve crucial purposes for complex new relief programs like ERTC:

  • Increases clarity for employers when navigating eligibility
  • Provides consistency in how rules are applied
  • Resolves common questions and points of uncertainty
  • Closes loopholes preventing duplicative benefit claims
  • Bolsters audit-proof documentation trails
  • Allows broader, retroactive relief access
  • Facilitates claiming credits confidently and compliantly

Employers who thoroughly incorporate guidance can maximize relief and minimize risk.

Conclusion

IRS Notice 2021-20 delivers pivotal new guidance on ERTC qualification, computation, documentation, and coordination with other COVID programs like PPP. Employers seeking these valuable credits must closely analyze provisions relevant to their situation and apply instructions meticulously. Although evolving clarifications create compliance intricacies, they provide critical guardrails for optimizing relief potential in keeping with legislative intent. Employers willing to invest the effort needed to integrate guidance can continue leveraging ERTC as intended – providing focused payroll support to retain employees through pandemic challenges.

FAQs

Q: Can I still claim ERTC if I received a PPP loan?

A: Yes, but only on wages not paid for with the forgiven PPP funds. Careful tracking is required.

Q: What documents should I keep to support eligibility?

A: Financial statements, government orders, organizational charts, payroll records, PPP loan data, and impact descriptions.

Q: Can I aggregate affiliated entities when testing decline thresholds?

A: Yes, gross receipts declines can be aggregated across entities in controlled or affiliated groups.

Q: What periods can I claim ERTC for now?

A: Amended returns can claim ERTC back to the original CARES Act enactment date.

Q: How do I claim the newly available ERTC retroactively?

A: File amended returns and include a detailed explanation of the change in amounts and the reason for amending.

Resources

IRS Notice 2021-20: https://www.irs.gov/pub/irs-drop/n-21-20.pdf

IRS Instructions for Form 941: https://www.irs.gov/pub/irs-pdf/i941.pdf

IRS Amended Return Instructions: https://www.irs.gov/forms-pubs/about-form-1040x

AICPA Summary of Notice 2021-20: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-employee-retention-credit-notice-2021-20.pdf

Chamber of Commerce ERTC Guidance: https://www.uschamber.com/co/run/human-resources/employee-retention-tax-credit-answers-to-top-questions

Thoroughly analyzing and applying relevant Notice 2021-20 guidance is key to maximizing ERTC under evolving IRS rules. Consult a tax professional for guidance specific to your circumstances.

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