The Internal Revenue Service (IRS) has issued some long awaited guidance about the Employee Retention Credit (ERC), specifically the retroactive ERC for 2020. The guidance is over 100 pages long, but it answers two key questions that everyone had about wages used for Paycheck Protection Program (PPP) loan forgiveness and how do you apply for the credit. Be aware that at the beginning of the document it mentions this focuses on the retroactive credit and that guidance about the 2021 credit has not been issued yet. If you’re wondering what the ERC even is, here is a past articles on the topic with some more details.
Question: If I applied for PPP loan forgiveness with more wages than I needed, can I use those excess wages for the ERC?
Answer: Yes, you can use the excess wages for the ERC.
The IRS Q&A isn’t that simple but gets to that same answer with some things to keep in mind.
- You still need to maintain the minimum payroll ratio of 60% for the PPP loan.
- You cannot go back and say I could have used rent, utilities, medical insurance, etc. If the expenses were not part of your application, you cannot factor them into the calculation of wages available for the ERC. If you did include those items on your forgiveness application, then they can be considered in determining how much of the wages used on the application weren’t needed for PPP forgiveness.
- This is not in the Q&A, but you need to keep in mind the impact of any penalties, such as a reduction in full-time equivalents or wage reductions. If you have these then the math is a little more difficult.
- See examples starting on pages 77 and 78 of the IRS Retroactive ERC Guidance.
Question: I qualify and have my credit calculated. How do I take the credit for a past period?
Answer: You will file a 941-X and amend your past 941 for that time period. The 941-X will show the amount of credit you are taking. You DO NOT take the credit on a current 941 filing to “catch-up”.
- See an example of this on page 88 and 89 of the IRS Retroactive ERC Guidance.
There is additional clarification in the guidance. One key item is that the credit reduces your income tax deduction, so if you took the full $5,000 credit for an employee, then that reduces the amount of wages for that employee you can deduct. Other topics include what to do if you use a “Third-Party Payer”, such as a PEO, CPEO, etc. You can take the credit and the guidance discusses how to do that over a few pages and examples.
At the end, on page 100, there is a section concerning what information you need to have to substantiate the credit amount. You do not need to submit anything, but you do need to create and maintain certain records. These records should be maintained for 4 years after the date the tax becomes due or is paid, whichever is later. These include but are not limited to:
- Governmental orders to suspend business operations.
- Records used to determine the employer experienced a significant decline in gross receipts.
- Records of which employees received qualified wages and in what amounts.
- Copies of the completed federal employment tax returns submitted to the IRS.
Determining and calculating the ERC can be complicated, especially if you had already filed for PPP forgiveness. We have already done some calculations for clients and worked through some of the allocation issues mentioned above. The credits can be substantial (at most it would be $5,000 per employee so if you have 50 employees it could be $250,000 for example). Please reach out for assistance or with questions.