Employee retention credit changes leave practitioners with questions

The IRS recently posted instructions on its website explaining how taxpayers who did not get their Paycheck Protection Program (PPP) loan forgiven can claim the employee retention credit (ERC) when they file their employment tax return. However, the guidance addresses only the situation in which the employer was denied PPP forgiveness; it does not address the larger question of how the reporting of wages as payroll costs on a previously filed PPP loan forgiveness application will affect an employer’s ability to claim the ERC for wages that were included on a loan forgiveness application but did not affect the amount of loan forgiveness.

In the guidance posted to its website, the IRS says that if an employer received a PPP loan and included wages paid in the second and/or third quarter of 2020 as payroll costs to support an application for loan forgiveness, instead of claiming the ERC for those wages, and whose request for forgiveness was denied, it can claim the ERC for those qualified wages on its fourth quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.

The IRS says that is also where employers report any ERC attributable to health expenses that are qualified wages that weren’t included on their second and/or third quarter Form 941. The IRS has instructions for how to claim the credits on the form.

In IR-2021-21, the IRS explains how the ERC was extended and amended by the year-end legislation.

The Consolidated Appropriations Act, 2021, P.L. 116-260, extends the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, ERC through June 30, 2021. It also expands the ERC and makes technical corrections. The expansions of the credit include:

• An increase in the credit rate from 50% to 70% of qualified wages;
• An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
• A reduction in the required year-over-year gross receipts decline from 50% to 20%;
• A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
• A provision to allow certain governmental employers to claim the credit;
• An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
• Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.

The new provision that employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds has raised questions about how the reporting of wages as payroll costs on a previously filed PPP loan forgiveness application will affect an employer’s ability to claim the ERC for wages that were included on a loan forgiveness application but did not affect the amount of loan forgiveness. As reported earlier, the AICPA has requested guidance from the IRS and Treasury providing that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.

Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.

AICPA experts discuss the latest on the PPP and other small business aid programs during a biweekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.