Legislative Update: Implications of New IRS Guidance on ERC in Notice 2021-20

March 12, 2021

What happened?

  • On March 1, the IRS released Notice 2021-20, a 102 page document that now supersedes the previously-issued FAQs.
  • A Notice is more authoritative than FAQs, but still does not carry the force of regulation.

Why did they do this?

  • When they were initially introduced, some of the IRS FAQs generated new questions and “gray areas” for tax professionals. Up to this point, many decisions regarding ERC eligibility were subjective, based on guidance the IRS has provided. The Notice 2021-20 was clearly intended to provide more solid guidance for some of these areas.
  • Because of the retroactive change to allow PPP recipients to take ERC, the IRS sought to address some of the most urgent questions about how the two programs interact.

Why does it matter?

  • The guidance in the Notice regarding the interaction with PPP is helpful and will be summarized separately.
  • The FAQs had indicated that essential businesses could still be considered partially suspended, “if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.” The term “nominal” was never defined in the FAQ.
    • The Notice expands this “more than nominal” requirement to apply to any partial suspension, not just the partial suspension of essential business.
    • The Notice introduces a new definition of nominal: “Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).”

What does it mean?

  • According to a source who spoke with the Notice’s author, the new definition of “nominal” is meant to be a “safe harbor,” as opposed to an absolute rule. In particular, he pointed to the phrase, “will be deemed,” and indicated that that phrase was specifically chosen to indicate the rule is meant as a safe harbor.
    • The idea of a safe harbor is to provide a standard for which the taxpayer can act with certainty that the IRS will agree.
    • Positions that differ with the safe harbor may also be acceptable, but will be subject to more scrutiny.
    • However, the safe harbor provided in this Notice is itself not always clearly applicable, and therefore the IRS could always question how a taxpayer arrived at the justification that they meet the safe harbor.
      • For example, see the new question D-18, where it says, “A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations,” but no numerator or denominator are suggested for calculating that percentage.
    • Without modification to this guidance, positions that assert that businesses were partially suspended due to government orders and that do not meet this safe harbor standard for “more than nominal” will face some risk.

Learn more about the Employee Retention Credit (ERC).

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