- Companies denied forgiveness of their Paycheck Protection Program loan can take a tax credit for the amount of proceeds they used to pay wages, the IRS said in a notice released last week.
- The employee retention credit only applies to wages paid in the 2nd and 3rd quarters of last year and are eligible for the credit on the companies’ 4th quarter return.
- The policy reflects a change Congress passed as part of its stimulus bill in December. Prior to the change, companies couldn’t take the credit if they also took a PPP loan. Now they can take the credit if they’re a loan recipient, as long as the loan doesn’t qualify for forgiveness.
Under PPP, loan recipients can apply for forgiveness if they use at least 60% of the proceeds for wages and the remaining funds for other eligible expenses, including rent or mortgage, utilities, among other operating costs.
Given the short time frame for submitting the 4th quarter return, companies opting to take the credit can use an adjusted filing later in the year instead.
“We understand this might be difficult to implement so late in the timeframe to file your 4th quarter return,” the IRS said. “You can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.”
In addition to wages, health expenses that are considered qualified wages can also be eligible for the credit.
Companies that use the 4th quarter procedure should add the ERC attributable to the 2nd and 3rd quarter wages on line 11c or line 13d of the original 4th quarter Form 941, the IRS said.
Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter on line 21 of the original 4th quarter Form 941.
Enter the same amount on Worksheet 1, Step 3, line 3a.
Include the amount of the health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941.
Enter the same amount on Worksheet 1, Step 3, line 3b.