On March 1, 2021, the IRS issued Notice 2021-20 that provides guidance for employers claiming the Employee Retention Tax Credit. However, the notice only provides guidance for the credit as it applies to qualified wages paid between March 12, 2020 and Sept. 30, 2021, which is the program’s new end date for most businesses. Additionally, the bulk of the notice reiterates the ERTC FAQs that previously were published on the IRS website.
Included in the notice is guidance on how employers who received a loan can retroactively claim the employee retention tax credit. In order to claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid. The IRS includes three examples (Q&A No. 57) to highlight the process.
The IRS notice 2021-20 includes seven examples (Q&A No. 49) with scenarios of how an employer with a loan determines which wages, if any, are eligible for the tax credit. The amount of wages eligible largely depends on how the qualified wages were reflected on the loan forgiveness application. Qualified wages included in reported payroll costs on the forgiveness application may be utilized in certain conditions where more expenses than necessary were used to justify the loan forgiveness. In these cases, the IRS will take the minimum wage cost necessary when combined with other eligible expenses to justify loan forgiveness.
However, the IRS makes it clear that expenses eligible for forgiveness that were not included in the loan forgiveness application cannot be factored in after the fact. Consequently, it’s important to ensure all eligible expenses, including non-payroll costs such as utilities, rent and operations expenses, to name a few, are included on loan forgiveness applications in order to maximize the qualified wages available for ERTC.