On March 1, the IRS released Notice 2021-20 providing guidance on the employee retention credit (ERC). While a significant portion of the Notice formalizes previously released frequently asked questions, the Notice also provides new guidance on several important areas, including the interaction of the ERC with the Paycheck Protection Program (PPP) and additional guidance on what constitutes a partial suspension of operations for ERC purposes.
How to Use PPP and ERC
The PPP and ERC were enacted in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Originally, the PPP and ERC were mutually exclusive, meaning a PPP borrower could not also claim the ERC.
However, the Consolidated Appropriations Acts, 2021 (CAA) retroactively undid this mutual exclusivity, meaning a PPP borrower can now also claim the ERC, although the CAA also stated a PPP borrower’s payroll expenses giving rise to loan forgiveness can not also be used for ERC purposes.
Unstated in the CAA is how a round 1 or round 2 PPP borrower apportions qualified payroll between the PPP and ERC when the PPP covered period (generally a period of up to 24 weeks for a borrower to generate expenditures giving rise to forgiveness) overlaps with a 2020 or 2021 quarter that the borrower also wants to use for ERC purposes.
Eligible Employer Definition
In response, the Notice deems an “eligible employer” to have elected not to include any qualified wages for ERC purposes “up to (but not exceeding) the minimum amount of payroll costs, together with any other eligible expenses reported on the PPP Loan Forgiveness Application, sufficient to support the amount of the PPP loan that is forgiven.” Additionally, if any qualified wages are included on a PPP loan forgiveness application, but the loan is not forgiven, those qualified wages can be taken into account for ERC purposes.
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