The latest stimulus bill that passed in December 2020 provides for an expansion of the employee retention credit. Our previous communications covered the highlights of the bill, calculation of the credit and how it interplays with Paycheck Protection Program (PPP). This article will cover the additional limited guidance issued by the IRS on January 22, 2021 related to claiming of the employer retention credit for those employers that had their PPP forgiveness denied.
Employers that have not yet applied for forgiveness on their PPP loans should consider if they meet the criteria for the employee retention credit. If eligibility is met, either by a reduction in revenue or subject to a shutdown order, the employer would need to utilize the employee retention credit first.
Employers can now claim the Employee Retention Credit (ERC) on qualified wages that are not counted as payroll costs in receiving PPP loan forgiveness. This was reiterated by the IRS in their guidance. “Any wages that could count toward eligibility for either the ERC or PPP loan forgiveness can be applied to either of these two programs but not both.”
However, the issued guidance specifically addresses the process for employers that had their PPP forgiveness applications denied. At this time, unfortunately, we do not have guidance for those employers that have applied for forgiveness and may have excess wages not utilized in the forgiveness application.
For those employers with PPP forgiveness applications denied, the IRS guidance provides a basic framework to claim the ERC credit in the 4th quarter for eligible wages from 2nd, 3rd and 4th quarters.
TO CLAIM THE EMPLOYEE RETENTION CREDIT, FOLLOW THESE SPECIFIC STEPS
- Add the eligible wages and allocable health expenses for all three quarters on line 11c or line 13d (as relevant) of their original fourth quarter Form 941.
- Include the amount of the qualified wages for all three quarters (excluding health expenses) on line 21 of its original fourth quarter Form 941.
- Enter the same amount (from step 2) on Worksheet 1, Step 3, line 3a.
- Include the amount of these health plan expenses (all three quarters) on line 22 of the fourth quarter Form 941.
- Enter the same amount (from step 4) on Worksheet 1, Step 3, line 3b.
In short, the employer can report all three quarters of eligible wages and allocable expenses as if they were all paid in fourth quarter. Depending on the size of the credit this may result in a refundable credit in excess of the tax liability on the fourth quarter payroll tax return.
Alternatively, the employer may choose to amend each quarter 941 individually in order to claim the credits. Since the due date of the fourth quarter 941 is so very near we are suggesting filing a timely return and amending each quarter.
The IRS acknowledged the tight timeline and indicated it was not necessary to follow the limited 4th quarter procedure. “We understand this might be difficult to implement so late in the timeframe to file your 4th quarter return. You do not have to use this limited 4th quarter procedure. You can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.”
It is anticipated that the IRS will issue a more detailed guidance to address unanswered questions. For example:
- What is the procedure to opt out of the employee retention credit if an employer would like additional wages available for PPP?
- If an employer didn’t opt out of the employee retention credit, received forgiveness on PPP but has additional wages in 4th quarter 2020 are these available for employee retention credit?
- If a forgiveness application has been submitted but not yet approved could an employer pull it back and claim employee retention credit first?
These are just a few of the potential questions that additional guidance is needed to answer.
Smith Schafer can help you leverage opportunities and make the best decisions for your company. For additional information and guidance, visit our COVID-19 Resource Center on our website.