IRS Provides Guidance on Employee Retention Credit Eligibility Rules

By Barbara Ashorn, CPA, Shareholder, Houston Tax Advisor

The Internal Revenue Service (IRS) has released guidance for employers claiming the employee retention credit (ERC), including clarifications and retroactive changes under the new law applicable to 2020, primarily related to the expanded eligibility for the credit.

Latest IRS Guidance Details

Here are key takeaways related to the ERC provided by the IRS in Notice 2020-21:

• Qualified Wages. For 2020, the ERC can be claimed by employers who paid qualified wages after March 12, 2020, and before Jan. 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50% of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.
• Interaction with Paycheck Protection Program (PPP) Loans. A significant change for 2020 brought on by the Consolidated Appropriations Act of 2021 was the allowance of employers with a Paycheck Protection Program (PPP) loan to claim the ERC. However, the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the ERC.
• Aggregation Rules. All entities that are members of a controlled group of corporations, trades or businesses under common control will be treated as a single employer for purposes of applying the ERC. As a result, employers required to be aggregated are treated as a single employer for purposes of the following rules applicable to the ERC:
  • Determining whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID-19 from an appropriate governmental authority
  • Determining whether the employer experiences a significant decline in gross receipts
  • Determining whether the employer averaged more than 100 full-time employees and
  • Determining the maximum credit amount per employee.
• Documentation Requirements. Employers must provide documentation to show how they determined their eligibility, including:
  • Any governmental order to suspend the employer’s business operations.
  • Any records the employer relied upon to determine whether their operations were suspended due to a governmental order.
  • Any records the employer used to determine it experienced a significant decline in gross receipts.
  • Any records of which employees received qualified wages and in what amounts, and
  • In the case of a large eligible employer, work records and documentation showing that wages were paid for a time an employee was not providing services.

Employers will also be required to submit documentation such as how it determined the amount of allocable qualified health plan expenses and whether the employer was treated as a member of an aggregated group for purposes for the ERC, plus copies for copies of completed federal employment tax returns.

Eligibility Test

To determine your overall ERC eligibility, answer the questions below related to your business:

1. Are you a privately owned business or tax-exempt organization that carried on a trade or business during calendar 2020 or 2021?
2. Do you meet at least one of these three qualifications?
   a. Your operations were fully or partially suspended during any calendar quarter in 2020 or 2021 due to governmental orders limiting your business activities due to COVID-19.
   b. You experienced a decline in aggregate gross receipts during any calendar quarter in 2020 of more than 50% compared to the same quarter in 2019.
   c. You experienced a decline in aggregate gross receipts during any calendar quarter in 2021 of more than 20% compared to the same quarter in 2019.
3. Did you pay wages after March 12, 2020, and before July 1, 2021, that were not or will not be included in a PPP loan forgiveness application?

If you answered “yes” to all three questions, you may qualify for the ERC. Be sure to work with your tax advisor to ensure you are maximizing your credit.

Doeren Mayhew continues to follow guidance related to the ERC as it relates to changes for 2021. To obtain tax advisory assistance, contact us today.