On March 1, 2021, the IRS released Notice 2021-20, providing long-awaited guidance on the retroactive changes made to the employee retention credit (ERC) by the Consolidated Appropriations Act, 2021 (CAA). The notice is mainly in the form of 71 frequently asked questions (FAQ), most of which are similar to the ERC FAQ the IRS previously published on its website. Specifically, the notice outlines how Paycheck Protection Program (PPP) loan borrowers who have already applied for forgiveness can claim the ERC. Broadly, the ERC can be retroactively claimed for qualified wages reported on a forgiveness application that exceed the total reported payroll and nonpayroll costs needed to support the forgiven amount of the loan.
Further, the notice adopts the definition of “full-time employee,” initially provided by the IRS FAQ for use in determining an employer’s headcount to assess whether it is a large or small employer, without requiring either seasonal workers or part-time employees be included in the computation. It also defines key terms used in determining whether an employer is eligible under the suspension test.
This tax alert is a preliminary overview of critical points covered by the notice. Baker Tilly will provide additional information in the coming weeks and months as we analyze the guidance in detail.
Key takeaways
- The notice retains the FAQ format of the preexisting IRS guidance: updating it for retroactive changes made to the ERC by the CAA and making additional clarifications. The notice does not cover CAA updates to the credit that apply exclusively to 2021. While the guidance relies on the FAQ format, by being incorporated in a notice and formally published in the Internal Revenue Bulletin, it allows taxpayers to rely on the contents for penalty protection.
- Determining PPP loan recipient’s qualified wages: A PPP loan recipient is deemed to have made an election under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to exclude qualified wages from its ERC determination for all wages that are reported on an application for forgiveness —
