In March 2020, Congress created The Coronavirus Aid, Relief, and Economic Security Act (CARES) in response to the pandemic and its impact on U.S. businesses. Included in the act was the Employee Retention Credit (ERC), a fully refundable tax credit employers can use to help keep businesses open and employees paid provided employees were kept on payroll.
The ERC equals up to 50% of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020. Originally this credit was not available to PPP loan recipients who received loan forgiveness.
For 2020, the ERC can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts.
A significant change made by the Taxpayer Certainty and Disaster Relief Act in December 2020 made it easier for employers who received a PPP loan to claim the employee retention credit, although the same wages cannot be counted for seeking both forgiveness of the PPP loan and calculating the employee retention credit.
An employer can receive the ERC for qualified wages by reporting the amounts on the designated lines of its federal employment tax returns.
IRS Notice 2021-20 explains when and how employers who received a PPP loan can claim the employee retention credit for 2020. The guidance reiterates information the IRS already had provided in its employee retention credit FAQs, but includes some clarifications and explains the retroactive changes to the CARES Act under the COVID-19 relief package passed by Congress in December.
The IRS guidance in Notice 2021-20 further explains which employers are eligible for ERC; what constitutes full or partial suspension of trade or business operations; and what constitutes a significant decline in gross receipts. Other issues addressed are the maximum employee credit amount, qualified wages, and how to claim and substantiate the ERC.
To date, Notice 2021-20 only addresses the rules applicable to 2020. The IRS said it plans to release additional guidance at a later date on the new round of PPP funding, which opened on January 11, 2021.
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