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Employment Tax Credit Guidance Leaves Practitioners Wanting More

Posted on Jan. 26, 2021

The IRS clarified how businesses can qualify for an employment tax credit even if they also received a coronavirus loan that wasn’t forgiven, but many hope the guidance is just the start of more to come.

The agency on January 22 posted guidance on its website saying that employers that received Paycheck Protection Program loans and included wages as part of payroll costs to support having their loans forgiven tax free but saw their forgiveness denied could claim the employee retention credit for those wages on fourth-quarter payroll tax returns.

Thomas Neuhoff, a Texas-based certified public accountant, said the vast majority of businesses are in one of two camps: Either they have applied for and received forgiveness in full or they have yet to apply for forgiveness.

“In other words, this guidance does little to help the vast majority of businesses in need of information to claim their 2020 and 2021 employee retention credits,” Neuhoff told Tax Notes.

The guidance was released after Congress made changes to its earlier coronavirus economic relief. Under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), businesses had the option of taking out a PPP loan and using a specified portion on payroll costs in order to have the loan forgiven tax free. Another option was the ERC, which is refundable and is applied against the employer’s portion of payroll taxes, but only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.

The PPP and ERC were mutually exclusive — businesses had to pick one or the other. But in the Consolidated Appropriations Act, 2021 (P.L. 116-260), Congress allowed businesses to take advantage of both programs, although they couldn’t overlap. Wages could either count toward payroll costs under the PPP or qualify for the ERC, but the same wages couldn’t qualify for both.

The ERC was expanded for the first two quarters of 2021, and businesses can now claim up to $14,000 in credits per employee as long as other requirements are met. The PPP was also expanded, and in some cases borrowers are able to obtain a second loan in 2021. (Prior analysis.)

Under the latest round of guidance, the IRS said if a PPP application for forgiveness was denied, the business can claim the ERC on the qualified wages on its fourth-quarter 2020 Form 941, “Employer’s Quarterly Federal Tax Return.”

But according to Neuhoff, the real concerns businesses face haven’t been addressed.

For example, what if a business filed an application for PPP loan forgiveness that reflected $500,000 of payroll costs for a loan of $300,000? Neuhoff asked. It’s unclear whether the $200,000 not needed for PPP forgiveness but already listed on the forgiveness application will qualify for the ERC.

Neuhoff added that he’d also like to see in writing that the PPP borrower receiving a second PPP loan can allocate each dollar of payroll during the covered period to either PPP forgiveness or a 2021 ERC.

Glen Birnbaum of Sikich LLP was curious whether, and how much, more guidance on the ERC is imminent.  

“With the new guidance posted by the IRS, practitioners are left wondering what additional guidance is coming and whether the catch-up procedure applies in other situations,” Birnbaum said. “In addition to the restrictive statutory language on the catch-up procedure, it seems like the IRS is encouraging amended payroll tax returns so as to better track the wages between PPP and ERC. Worksheet 1 to Form 941 will perhaps be revised to help with this tracking and future audits.”

The guidance also explains that businesses can report on their fourth-quarter Form 941 any ERC attributable to health expenses that are qualified wages that it didn’t include on its second- or third-quarter Forms 941. The guidance describes how businesses can use this option to claim additional amounts of ERC.

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