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IRS Formalizes Employee Retention Credit FAQs

Posted on Mar. 2, 2021

A new IRS notice offers a list of frequently asked questions about the COVID-19 relief employee retention credit, thereby allowing taxpayers to rely on the guidance for penalty prevention purposes.

Notice 2021-20, 2021-11 IRB 1, released March 1, both formalizes the IRS’s FAQs issued for the original version of the program under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and adapts the guidance to changes that have happened since then.

Notably, Notice 2021-20 updates the FAQs for changes made to the program by the Consolidated Appropriations Act, 2021 (P.L. 116-260), enacted in late December 2020. Originally, taxpayers had to pick between the forgivable Paycheck Protection Program loans and the employee retention credit, but the latest statute allows the use of both, as long as the taxpayers have sufficient wage expenses.

In January the American Institute of CPAs asked the IRS for more guidance about what to do if a taxpayer listed wages on PPP loan forgiveness applications that don’t affect the forgivable amount. Plus, taxpayers now eligible to use both programs may not have included non-payroll costs on their forgiveness applications and want to now add those to free up some wages for use on the employee retention credit, the AICPA noted.

After the IRS provided guidance about what happens if an application for PPP guidance is denied, practitioners reiterated their request for guidance on excess wages reported on forgiveness applications.

Notice 2021-20 offers guidance that taxpayers and practitioners likely wanted about excess wage costs reported on forgiveness applications, but it didn’t provide the requested relief on unlisted but eligible expenses.

Question 49 describes the interaction between the PPP and employee retention credit, in which the IRS allows a taxpayer using both programs to either make an explicit election or rely on an implicit one.

According to the IRS, “the amount for which the eligible employer is deemed to have made the election is the amount of qualified wages included in the payroll costs reported on the PPP Loan Forgiveness Application up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven.” The implicit deemed election doesn’t include wages paid by the taxpayer and not reported on a PPP loan forgiveness application under the answer to question 49.

Further, a taxpayer that only gets part of a loan forgiven will only be deemed to have elected to use wages on the PPP, rather than the employee retention credit, that are the minimum required to cover the amount actually forgiven.

The bad news comes in the third example for question 49, in which the taxpayer had a $200,000 PPP loan and reported $200,000 of wages on its loan forgiveness application. The taxpayer also had $70,000 worth of other eligible expenses, but didn’t include those on the application, although it could have.

The IRS’s position is that the taxpayer “cannot reduce the deemed election by the amount of the other eligible expenses that it could have reported on its PPP Loan Forgiveness Application.” To free up wages from the PPP for use on the employee retention credit, the taxpayer must include those other expenses on its forgiveness application, as illustrated in the fourth example.

Nathan T. Smith of CBIZ Inc. said the notice also addresses a lack of guidance on the taxability of the employee retention credit by stating that the deduction for payroll taxes like this one shouldn’t be reduced. “This is a good answer, but it leaves one to wonder how the IRS (and the Joint Committee on Taxation) arrived at this conclusion.  Taxpayers are either getting a deduction for payroll tax expense that was not incurred, or [they] are getting tax-free gross income equal to the credit amount,” he added in an email.

By publishing the new FAQ as Notice 2021-20, the IRS has addressed one of the issues practitioners have been complaining about: the perception of the agency’s overreliance on informal guidance. Recently departed IRS Chief Counsel Michael J. Desmond predicted the IRS would formally publish more FAQs in the Internal Revenue Bulletin, thereby allowing taxpayers to formally rely on them for penalty protection.

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