IRS answers important ERTC questions in recent guidance
by Benjamin R. Bostic
This month, for the first time, the IRS released authoritative guidance covering all things having to do with Employee Retention Tax Credits.
The guidance included new information on how businesses may still claim certain payroll costs utilized on their PPP loan forgiveness application for ERTC purposes. The IRS also clarifies how to determine if a government order has a more than “nominal” effect on a business resulting in a partial shutdown.
Generally, wage and health plan expenses included as part of PPP forgiveness cannot be counted for ERTC purposes because businesses are not allowed to “double-dip” and get credit under both programs for the same costs.
However, the IRS has clarified two situations when a business may claim wages and health plan expenses included in their PPP loan forgiveness application for employee retention tax credits. While the IRS had much of this information on its website in a FAQ, this latest guidance reaffirms the IRS’ stance and can be cited should any challenges arise.
Additionally, the IRS further defined when businesses can cite government lock-down orders as causing the full or partial suspension of trade.
The following is a breakdown of the latest IRS guidance, which can be found here: https://www.irs.gov/pub/irs-drop/n-21-20.pdf
Claiming wage & health care expenses that were part of their PPP forgiveness
Businesses can claim wage and health care plan expenses as part of PPP forgiveness and ERTC credits in these two scenarios:
- Wages, health care costs, and other eligible costs exceed PPP loan forgiveness In this case, an employer can apply for ERTC credits for the amount not already covered by PPP forgiveness. Here are three examples showing how this can work:
- Business A receives a PPP loan for $200,000 and lists eligible wages of $250,000 on their PPP loan forgiveness application. The payroll costs in excess of the minimum amount required, $50,000 ($250,000 - $200,000), are eligible for ERTC purposes.
- Business B receives a PPP loan for $300,000 lists eligible wages of $400,000 on their PPP loan forgiveness application – but incurred $50,000 of additional non-payroll costs also included on their PPP loan forgiveness application. The payroll costs in excess of the minimum amount required, $150,000 ($400,000 - $250,000), are eligible for ERTC purposes.
- If Business B submitted their PPP loan forgiveness application and did not include the additional non-payroll costs of $50,000, they would only be able to utilize $100,000 for employee retention credit purposes ($400,000 - $300,000).
- The PPP loan is not forgiven
Suppose an eligible employer reports any qualified wages as payroll costs on a PPP loan forgiveness application. Still, the loan is not forgiven by reason of a decision under section 7A(g) of the Small Business Act.
In that case, those qualified wages may subsequently be treated as subject to section 2301 of the CARES Act and may count for purposes of the Employee Retention Tax Credit.
What counts as government-ordered full or partial suspension of business operations
There appears to be misinformation and a lack of understanding concerning when businesses can cite government orders as causing the full or partial suspension of trade, which the IRS has sought to clarify.
The guidance makes it clear that shutdown orders must be official acts – not merely statements made during a press conference or media reports.
Also, state of emergency declarations only count if they limit commerce, travel, or group meetings that impact more than a nominal portion of a business’s operation or trade.
What is “more than a nominal portion,” according to the IRS?
A government order results in a partial suspension of business if the business operations for the impacted portion of the business meets either of the following criteria:
- Gross receipts from that portion of business operations is not less than 10 percent of the total gross receipts. Businesses determine this by looking back to the same calendar quarter in 2019. IE, if a business was subject to a government order that shuts down a portion of their operation during Q2 of 2020, that part of the company must have accounted for more than 10 percent of total gross receipts during Q2 of 2019.
- Hours of service performed by employees in that portion of business are not less than 10 percent of all employees' total number of service. This is determined by looking back to the same calendar quarter in 2019. IE, if a business was subject to a government order that shuts down a portion of their business during Q2 of 2020, employees' hours in that part of the company must have accounted for more than 10 percent of total number of hours of service during Q2 of 2019.
For most businesses, a government order likely impacts the entire operation, but the second provision may apply to those with different business segments.
For example, occupancy restrictions at a restaurant with indoor dining service may result in more than a 10 percent reduction of the restaurant’s ability to service customers. However, for IRS purposes, an occupancy restriction at a retailer with sufficient physical space to still accommodate its customers will likely not result in a “more than nominal” impact on its operation.
Governmental measures that qualify as “shutdown” orders
Overall, to count toward eligibility for an ERTC credit, the order must come from either the federal, state, or local government and limit “commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to [COVID-19].”
According to the IRS, employers who need to reduce operating hours due to a governmental order have had their operations limited by the order.
Governmental orders include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period.
- A state’s emergency proclamation that residents must shelter in place for a specified period except for those employed by an essential business.
- An order from a local official imposing a curfew on residents impacts the operating hours of a trade or business for a specified period.
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
The guidelines surrounding federal COVID-19 relief programs frequently change and are complex. The Boyer & Ritter team keeps track of the latest developments and is ready to help you maximize both the assistance and PPP loan forgiveness to which your business is entitled.
To learn more about engaging us for business relief assistance, please contact us HERE.
Benjamin R. Bostic, CPA, is a director at Boyer & Ritter with experience providing tax and accounting services for closely-held businesses, individuals, not-for-profit organizations. Reach Ben at 717-264-7456 or firstname.lastname@example.org