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Employers Previously Ineligible for the ERC Due to PPP Loans May Be Eligible to Claim Payroll Tax Refunds

Berdon Tax Team

3.9.21 | Client Alert

Last week, the Internal Revenue Service (IRS) issued Notice 2021-20, which provides information for employers claiming both the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) for the 2020 tax year. Originally, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), employers that received a PPP loan were not eligible to claim the ERC.  However, this past December, the Consolidated Appropriations Act, 2021 (CCA) retroactively liberalized eligibility, allowing employers to take advantage of both programs.

As a result of the retroactive changes to the 2020 tax year, the ERC can be claimed by employers who paid qualified wages after March 12, 2020 and before January 1, 2021 if the employer experienced either:

(i) A full or partial suspension of the operation of a trade or business due to a governmental order during any calendar quarter in 2020 or

(ii) If the employer experienced a significant decline in gross receipts (>50%) during a calendar quarter (measured by comparing the corresponding 2019 calendar quarter), even if that employer received a PPP loan during 2020.

For the 2020 tax year, up to 50% of the first $10,000 of qualified wages, including qualified health plan expenses, can be claimed per employee; thus allowing a maximum credit amount of $5,000 for each employee retained on payroll.  If an eligible employer averaged more than 100 full-time employees during 2019, however, qualified wages are only those wages paid to an employee who is not providing services during the economic hardship periods described above.

Among other things, IRS Notice 2021-20 explains that while employers can receive both a PPP loan and the ERC, the employer cannot count the same wages for both PPP loan forgiveness and in calculating the ERC.  Accordingly, the notice clarifies that qualified wages are generally eligible for the ERC unless the employer elects not to take into account certain qualified wages toward the credit on the employer’s quarterly federal tax return, Form 941.  An eligible employer makes this election by simply not claiming the ERC for those qualified wages on its employment tax form.  In addition, qualified wages that are included as payroll costs in the PPP loan forgiveness application will be considered a deemed election by the employer to apply such wages toward the PPP and not the ERC.  An employer is not deemed to have made such an election for any wages toward the PPP that are not included as payroll costs in the PPP loan forgiveness application.  Moreover, any excess wages reported on the forgiveness application will not be considered to have been claimed for PPP loan forgiveness.  Therefore, only those payroll costs included in the PPP loan forgiveness application that are enough to support the amount of the loan to be forgiven, should not be considered for the ERC.

Important Consideration

These clarifications provide opportunities for employers to re-evaluate the ERC for the 2020 tax year even if the employer received a PPP loan during 2020. If eligible for the retroactive benefit, employers can report any unclaimed qualified wages on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, to file a claim for refund with the IRS.

For more information about retroactively claiming the ERC, please contact your Berdon Advisor.

This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.