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    PPP Loan Program Tax Credits for Borrowers

    The PPP loan program has gotten another boost from Congress in the American Rescue Plan Act of 2021 with an additional $7.5 billion in funding. The latest COVID relief legislation also expands the eligibility of news organizations and non-profits for PPP loans, including organizations that have some limited political activities. One disappointment is that the legislation does not extend the PPP loan application deadline past March 31, 2021, although the House subsequently passed an extension of the deadline to May 31, 2021. The Senate is likely to agree to this extension.

    Other PPP changes and guidance from the IRS on coordinating the employee retention credit with the PPP rules are explained below.

    PPP for Self-Employed Taxpayers

    Recent SBA rules allow self-employed individuals who file Form 1040 Schedule C to calculate their maximum PPP loan amount using gross income instead of net profit, although this rule is not retroactive for loan applications approved before March 3, 2021. Self-employed taxpayers are disadvantaged by the lack of retroactivity because maximum loan amounts calculated on the basis of gross income can be significantly higher than the amount calculated based on net profit. The AICPA issued a statement calling for retroactivity as well as an extension of the PPP application deadline, but it is unclear whether the IRS will change its rules.

    Employee Retention Credit for PPP Borrowers

    The IRS released more guidance to help PPP borrowers work through the employee retention credit rules so they can take advantage of both programs. Notice 2021-20 clarifies the 2020 rules relating to expanded eligibility for the credit.

    Credit Basics

    For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. An employer has a significant decline in gross receipts if 2020 gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019. The suspension must be the result of a governmental order limiting commerce, travel, or group gatherings due to COVID-19.

    The credit is equal to 50% of qualified wages paid, including health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000. (Higher limits apply in 2021.) Employers that received a PPP loan can claim the employee retention credit but not for wages that are counted as part of the loan forgiveness.

    The Notice gives more details on eligibility, suspension of operations, gross receipts, electing in and out of the credit for PPP borrowers, and how and when to claim the credit.

    Who is Eligible?

    The Notice answers several questions relating to eligible taxpayers. Self-employed individuals are not eligible for the credit but may get the credit if they employ others in their business.

    Employers required to be aggregated, such as controlled groups, are treated as a single employer for purposes of the following rules:

    • Determining whether the employer has a business operation that was fully or partially suspended due to COVID-19 orders from a governmental authority.
    • Determining whether the employer experiences a significant decline in gross receipts. To be an eligible employer on the basis of a significant decline of gross receipts, the employer must take into account the gross receipts of all members of the aggregated group.
    • Determining whether the employer averaged more than 100 full-time employees, which affects the qualified wage calculation.
    • Determining the maximum credit amount per employee. If an employee is employed by two or more entities treated as a single employer under the aggregation rules, the maximum amount of qualified wages for all calendar quarters that may be taken into account for that employee is $10,000 in the aggregate.

    Suspension of Operations

    The Notice explains what constitutes full or partial suspension of business operations in different circumstances. An employer that operates an essential business is considered to have a partial suspension of operations if more than a nominal portion of its business operations are suspended by a governmental order based on changes in its gross receipts, hours, or services.

    The suspension also includes situations where employers cannot get delivery of critical goods or materials due to a governmental order that causes the supplier to suspend its operations. Lack of customers, however, cannot be the basis of the suspension. Closing a location but continuing comparable business with telework also is not a basis for the suspension requirement. However, if some of the work cannot be done remotely, the employer could have a partial suspension. The Notice includes numerous examples to illustrate these rules.

    Measuring Gross Receipts

    The period used to measure a decline in gross receipts is determined by identifying the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50% of those for the same quarter in 2019. The period ends with the earlier of January 1, 2021, or the calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of those for the same calendar quarter in 2019. This is a complicated rule. Here is an illustration.

    Example: Employer A’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third quarters of 2020. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third quarters of 2019. Employer A’s 2020 first, second, and third-quarter gross receipts were about 48%, 83%, and 92% of its 2019 gross receipts, respectively. Employer A experienced a significant decline in gross receipts beginning in the first calendar quarter of 2020 (the quarter in which gross receipts were less than 50% of 2019’s) and ending in the third calendar quarter of 2020 (the quarter following the first quarter in which the gross receipts were more than 80% of those in the same quarter of 2019). Thus, Employer A is an eligible employer during the first and second calendar quarters of 2020.

    The Notice also has examples for businesses that had no operations in 2019 and for taxpayers that acquired a business in 2020 or started a business in the middle of a quarter.

    Elections re PPP Coordination

    One point of confusion has been how to let the IRS know whether a PPP borrower is going to take the employee retention credit. The Notice clarifies how the election takes place.

    Employers can elect not to take into account wages for the employee retention credit simply by not claiming the credit for those qualified wages on their federal employment tax return. An employer is deemed to elect out for wages it includes in the amount reported as payroll costs on a PPP loan forgiveness application. If the forgiveness application is denied, then any portion of wages not forgiven again becomes eligible for the employee retention credit.

    Because of these rules, it is to the taxpayers’ advantage when filing for PPP forgiveness that they include the maximum documentable non-payroll costs in their forgiveness application. In that way, a taxpayer will have the most flexibility to designate wages eligible for the employee retention credit.

    How to Claim Credit

    Employers claim the credit by reporting qualified wages and the amount of the claimed credit on designated lines of its federal employment tax return, which for most employers is Form 941. In anticipation of receiving the credit, employers can (1) reduce their deposits of federal employment taxes, including withheld taxes, that would otherwise be required up to the amount of the expected credit, and (2) request an advance of the amount of the credit that exceeds the reduced federal employment tax deposits by filing Form 7200.

    Example of Advance Payment of Credit: Employer B paid $20,000 in qualified wages to two employees and is entitled to a credit of $10,000. Employer B is otherwise required to deposit $8,000 in federal employment taxes on all wages paid to all employees, after deferring its employer’s share of social security tax under the CAREs Act rules. Employer B did not choose to defer the employee’s share of social security tax. Employer B can keep the entire $8,000 of taxes without penalty as a portion of the credit it is entitled to claim on the Form 941. Employer B also may request an advance payment of the credit for the remaining $2,000 by submitting Form 7200.

    Employers also can go back and claim a credit for past quarters in which the employer did not use the credit by filing a claim for a refund or an interest-free adjustment.

    Related Deductions

    The Notice makes clear an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. However, an employer does not reduce its deduction for the employer’s share of social security and Medicare taxes by any portion of the credit taken.

    Substantiating Credit Eligibility

    The Notice explains how employers must substantiate their claims for the credit. Eligible employers must create and maintain numerous records, such as governmental orders to suspend business operations and documents related to treatment as an aggregated group. These records must be kept for at least four years after the date the tax becomes due or is paid, whichever comes later, according to the Notice.

    More Guidance Coming for 2021

    Note that this IRS Notice only applies to the 2020 rules. Forthcoming rules will address the extended and modified credit allowed in 2021.

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