As we went to press on Monday night, so did the Internal Revenue Service. It released Notice 2021-20. It’s primarily an update to the IRS’s previously published FAQ on the Employee Retention Credit.
While the 100 page notice is welcome additional guidance, we’re sorry to say that the IRS is generally taking, in our opinion, an overly restrictive view of which small businesses may qualify for the credit. Many governmental orders that would seem to result in a partial business shutdown are deemed “less than nominal” and dismissed by the IRS. Retailers and service sector businesses that can work remotely are particularly disadvantaged.
There is, however, some good news. The AICPA and other small business advocates did convince the IRS to allow some of the excess payroll costs reported on a previously filed PPP loan forgiveness application to be counted towards the ERC. Essentially, if you can lower the wages claimed on the forgiveness application without changing the amount of forgiveness, you can claim those wages when calculating the ERC. Of course, all other ERC requirements remain in place.
Why is this only a partial victory? Let us illustrate. Assume a loan amount of $500,000 and a loan forgiveness application claiming $600,000 of payroll costs. Assuming the borrower meets one or more of the pay rate and FTE safe harbors, the loan will be fully forgiven. If only $500,000 of payroll costs were claimed on the application, the loan would still be fully forgiven. The IRS will allow the difference of $100,000 to be used towards the ERC. Sounds generous, but it really isn’t. Our borrower probably has $300,000 in payroll costs that might qualify for the ERC. That’s because our borrower is denied the opportunity to claim $200,000 in non-payroll costs that were left off the application because, at the time it was filed, the costs were not necessary. So, our borrower is still being punished for filing early, for filing before the rules changed when the CAA was signed in December.
So, with an exercise of patience and planning, and proper coordination between your PPP loan forgiveness application and your claiming of the ERC, we still think that Patrick Begorra or one of his buddies will bring you a pot of gold. It just might be a little smaller than we hoped, since he must pass an IRS toll booth along the way.
As always, if you have questions about your specific situation, please don’t hesitate to contact your LSL partner or team member.