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IRS Issues Highly Anticipated Guidance on 2020 Employee Retention Credit

So technically, this an update to the updated update on the guidance that was updated last year, but I’m trying to stay focused. This is not a simple task nowadays, particularly in light of the pace at which these interpretations are coming in. One thing I’ll hopefully be able to do is stay focused on my attempt to NOT speculate on what the IRS is going to do next.  So far, I’m failing miserably. You didn’t come here to hear about this though, you just want the facts on the ERC. Got it. Here we go …

The IRS recently released Notice 2021-20. For the most part, it mimics the FAQs that have been up for months (that are actually very helpful). We’re going to focus on the areas where they added to or expanded on the original FAQs.

ERTC Impact on PPP Forgiveness

If you recall, you could originally not even think about the ERC and PPP at the same time. That’s now gone, and we know we can do both. But before we could, the most effective and efficient thing to do to get full PPP forgiveness was just to take your payroll over the entire 24-week covered period, put it on line 1 of the forgiveness application and be done. Boom … full forgiveness. But once they came out and said you can take both the PPP and the ERC (just not on the same payroll), everything changed. Now we wanted to MINIMIZE payroll AND get full forgiveness. That frees up max payroll for ERC. Our hope was that the IRS would tell us to go ahead and amend our applications for forgiveness to minimize payroll. Our dream was that they would tell us that there was no need to amend, just document what you would have done had you known this from the start. Our fear was that they would tell us whatever payroll costs you put on the forgiveness application – even if you didn’t need them – even if they exceeded your loan amount – are gone and no good for ERC. They kind of split the difference. They’re basically saying that any payroll costs that you put on the application for forgiveness are already spoken for – meaning no ERC – but ONLY to the extent that you NEEDED them for forgiveness. So, if you had a $75k PPP loan, and slapped $100k of payroll costs on your PPP loan for good measure, you only lost the $75k. They also said that if you have other eligible costs on the application, they can also offset how much payroll is already spoken for, but ONLY if they’re actually on the application. So, not a huge win, but not a loss.

Next big area is how to claim the credit. Our hope was that they’d just say to catch it all up on your next 941. Our dream was that we would get a special form to do one big catch-up ASAP – maybe via the 7200. Our fear was that they’d tell us to go back and amend all of our 2020 941s. Well, they nailed us on this one. Amended 941s, here we come. This means we’ll need to split out the eligible payroll by quarter and go back and file (potentially) four 941s and wait for the IRS to process all four. Good thing the IRS doesn’t already have enough forms to sift through.

Final item of consequence was the introduction of a “nominal” portion of your business and how we’re supposed to determine that. This relates to the at least partial suspension of your business.  The rules state that one way to qualify for the ERC is if your business was at least partially shut down by a governmental mandate. The “partial” thing is their focus here. The IRS is saying that if your business wasn’t completely shut down, the partial shut down must affect a portion of your business that is more than “nominal”. They put a bright line measurement in there that says that “nominal” is more than 10% of your revenue, or 10% of your hours. Unfortunately though, most businesses aren’t neatly organized into revenue and hours from selling stuff one way vs another way, so a shut down of one or the other isn’t always easy to quantify. The popular example here is the restaurant industry and the shut down or limitation of indoor dining. Clearly, indoor dining is more than a nominal portion of a restaurants’ business (assuming you have indoor dining), so you qualify. But what if you’re a service provider that offers a combined package of services, but one service is deemed life-sustaining while the others are not? You may not track the hours or revenue separately since they’re most likely all billed together. Even worse, what if the one life-sustaining service is the loss leader – the one that gets people to buy the package of services, but it’s the others that you make the money on. Is this nominal or not? This is where we’re left with the old “I know it when I see it” test, and the best way (in my opinion) to apply this test is to pizza. What is pizza (at its core)? It’s crust, sauce, and cheese, right? By weight and volume, the crust makes up almost the entire pizza. But what if you called your favorite pizza joint and they told you that they were out of sauce and cheese? You’re not going to order that (right?). But we just said that almost the entire pizza was crust. So what does that tell us? It tells us that “nominal” can’t always be measured.

So, there are the big three takeaways. There are a few other very narrow points to note in the notice, and if they apply to you, we’d love to talk. As always, our team is here to help. We stand ready to review your business, determine eligibility, and the amount of potential savings. Visit our ERC page today and a team member will be happy to assist!

 

About the Author

Mark Heath

Mark is a Partner with McKonly & Asbury. Serving as Director of Tax Services, he brings a wealth of experience in federal, state, and international income as well as franchise tax issues for both publicly and privately held corporatio… Read more

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