New Employee Retention Credit and PPP Guidance Released

On March 1, the IRS released Notice 2021-20 providing guidance on the employee retention credit (ERC). While a significant portion of the Notice formalizes previously released frequently asked questions, the Notice also provides new guidance on several important areas, including the interaction of the ERC with the Paycheck Protection Program (PPP) and additional guidance on what constitutes a partial suspension of operations for ERC purposes.

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How to Use PPP and ERC

The PPP and ERC were enacted in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Originally, the PPP and ERC were mutually exclusive, meaning a PPP borrower could not also claim the ERC.

However, the Consolidated Appropriations Acts, 2021 (CAA) retroactively undid this mutual exclusivity, meaning a PPP borrower can now also claim the ERC, although the CAA also stated a PPP borrower’s payroll expenses giving rise to loan forgiveness can not also be used for ERC purposes.

Unstated in the CAA is how a round 1 or round 2 PPP borrower apportions qualified payroll between the PPP and ERC when the PPP covered period (generally a period of up to 24 weeks for a borrower to generate expenditures giving rise to forgiveness) overlaps with a 2020 or 2021 quarter that the borrower also wants to use for ERC purposes.

Eligible Employer Definition

In response, the Notice deems an “eligible employer” to have elected not to include any qualified wages for ERC purposes “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.” Additionally, if any qualified wages are included on a PPP loan forgiveness application, but the loan is not forgiven, those qualified wages can be taken into account for ERC purposes.

Examples of PPP and ERC Interaction

The Notice, through examples, provides further details on the PPP and ERC interaction. Highlights of these examples include:

• PPP borrowers submitting qualified payroll expenses along with qualified non-payroll expenses on their forgiveness application are deemed to exclude from the ERC only the minimum necessary qualified payroll for PPP forgiveness purposes. For instance, a PPP borrower with a $100,000 loan listing $100,000 of qualified payroll plus $100,000 of qualified non-payroll expenses on the forgiveness application is deemed to use $60,000 of the qualified payroll and $40,000 of the qualified non-payroll for PPP forgiveness purposes (remember that at least 60% of a borrower’s qualified expenditures must relate to qualified payroll for PPP forgiveness purposes). This means the other $40,000 of qualified payroll is eligible for the ERC.
• PPP borrowers who only list qualified payroll on their forgiveness application are deemed to exclude 100% of the qualified payroll necessary for PPP loan forgiveness from their ERC calculation. For instance, a PPP borrower with a $100,000 loan listing only $150,000 of qualified payroll on their forgiveness application must exclude $100,000 of that qualified payroll for ERC purposes (i.e. the $50,000 “excess” is eligible to claim for the ERC).
• Only non-payroll expenses listed on the PPP forgiveness application are eligible to be considered for the PPP / ERC interaction. So, if a PPP borrower incurred non-payroll expenses that could have been listed on the forgiveness application but chose not to include these costs, the non-payroll costs incurred cannot be used to “free up” PPP payroll for the ERC.

Partial Suspension of Operations

ERC eligibility is based on an employer experiencing either a significant decline (50% for the 2020 ERC and 20% for the 2021 ERC) in gross receipts, or by having operations either fully or partially suspended due to a government order related to COVID-19. Determining whether operations are partially suspended due to a government order has been challenging for many employers due to the standard’s subjectivity.

While the initial FAQs provided some guidance and examples regarding the partial suspension of operations test, the Notice provides additional guidance in this area. For instance, in FAQs, the IRS previously stated that “more than a nominal portion” of operations needed to be suspended by a governmental order to meet the standard. The Notice outlines that the “more than a nominal” criterion is deemed to be met under the following scenarios:

• Gross receipts from the suspended portion of the business operations are 10% or more of the total gross receipts.
• Hours of service performed by employees in the suspended portion is 10% or more than the total hours of service.
• Modifications to business operations that result in a reduction of 10% or more in an employer’s ability to provide goods or services.

The Notice also provides other factors to consider for determining whether a modification required by a government order has impacted operations (e.g., occupancy limitations, changing format of service, etc.) and guidance on factors to consider in determining whether an employer is able to continue comparable operations prior to COVID-19 (e.g., telework capabilities, portability of employees’ work, etc.).

Other Items of Note in New Guidance on PPP and ERC

The Notice provided additional or modified guidance in several other ERC areas, including:

• Clarification on what governmental orders may be considered for determining ERC eligibility under the suspension of operations test.
• Impact of the ERC aggregation rules on determining the maximum credit for each employee and for allocating the credit for an employee that was paid wages from more than one member of the group.
• Outlines substantiation requirements and records that an employer should gather and retain when claiming the ERC.

What Comes Next for PPP and ERC?

While the Notice does provide for much needed clarity on some key issues for claiming the ERC for 2020, additional guidance is expected in the coming months. The Notice only provides guidance on the 2020 ERC and we expect the IRS to issue additional guidance in the future specific to the ERC for 2021.

In addition, while the CAA extended and expanded the ERC through June 30, 2021, there is currently legislation working its way through congress that would extend the ERC through December 31, 2021.

The PPP and ERC were intended to give relief to those suffering from economic impacts related to COVID-19. But compliance can be a challenge, and staying up to date with new regulations is a constant effort.

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