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New IRS Notice Further Clarifies Eligibility for the Employee Retention Credit

by Richard Morris, CPA, MST on March 5, 2021 in Coronavirus / COVID-19, Paycheck Protection Program, Taxation-Corporate

Last month, we wrote that passage of the Consolidated Appropriations Act in December clarified that some businesses seeking pandemic relief assistance would be eligible to apply for benefits under both the Paycheck Protection Program (PPP) and the employee retention credit (ERC). This marked a break from common sentiment since it was widely assumed throughout 2020 that businesses had to choose which program to participate in. As a result, the CAA also allowed businesses that did NOT claim the ERC in 2020  to do so retroactively.

On March 1, the IRS released Notice 2021-20, offering a further level of detail, which businesses should welcome to determine how to maximize the benefits offered by both programs. CBM’s interpretation of the new notice is:

  • A completed PPP loan forgiveness application with payroll costs reported is not considered an election to apply all reported wages towards the PPP. By simply reporting payroll costs on a forgiveness application, the costs are not precluded from being applied towards the ERC. For example, if a borrower had a PPP loan of $200,000, and reported $70,000 in nonpayroll costs and $200,000 in payroll costs on their application, then $70,000 (the excess payroll costs not applicable for forgiveness) would be eligible to apply for the ERC.
  • Any wages not listed on the PPP forgiveness application are available for the ERC, if eligible.
  • Eligibility for the ERC originally included a broad term that relies on businesses’ ability to indicate that “more than a nominal portion of its business operations are suspended by a governmental order”. Notice 2021-20 more clearly defines what is meant by “nominal” and makes the eligibility criteria more intelligible. The criteria is generous and should expand ERC eligibility to more businesses.

If your business is in the process of applying for PPP loan forgiveness, CBM’s advisors recommend pausing to evaluate eligibility for the ERC. Accurately reporting payroll costs on the forgiveness application is critical to borrowers who are also eligible for the ERC. Our team is available to assist borrowers with PPP forgiveness applications, PPP and ERC interaction, and advise on all aspects of both programs.

Please contact Richard Morris with any questions via our online contact form.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.