IRS Offers Option When P3 Loan Cancellation Denied

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Businesses that haven’t received a rebate on their Paycheck Protection Program loans can now claim a tax credit instead, thanks to a provision in last month’s coronavirus stimulus package.

The Internal Revenue Service has published information On Friday on how businesses that didn’t get the PPP loan they applied for can instead claim the employee retention credit for 2020 when they file a Form 941, the quarterly federal income tax return. employer, for the fourth quarter. The IRS pointed to a provision in the legislation that allows employers to claim the tax credit even if they have received a small business interruption loan under the Paycheck Protection Program. Previously, they were not allowed to claim the tax credit and get a P3 loan.

The PPP is part of the federal government’s response to the pandemic, providing forgivable loans guaranteed by the US Small Business Administration to companies that qualify by retaining their employees. The $ 349 billion first round of funding provided by Congress in the CARES Act last March proved so popular that Congress added an additional $ 310 billion. However, the ever-changing rules, complexities and uncertainty surrounding a company’s loan cancellation has deterred many companies from applying for the second round of PPP financing before it expired last summer. The $ 284 billion that was approved for the last round of funding includes much of the funding from the last round.

The SBA and Treasury have tried to streamline the process and lower the barriers this time around, encouraging more lending from community banks and working to get more loans from minority-owned businesses that don’t. were unable to obtain PPP loans last year. The latest guidelines are in line with efforts to ensure that companies that receive PPP loans also retain their employees. Last week, the SBA offered a one-page form to request loan forgiveness for businesses with loans of up to $ 150,000 (see the story).

IRS Headquarters in Washington, DC
Andrew Harrer / Bloomberg

The IRS said employers can claim the employee retention credit on any qualifying salary that is not counted as salary costs when obtaining a PPP loan forgiveness. “Any salaries that might count toward eligibility for ERC or PPP loan cancellation can be applied to one of these two programs, but not both,” the IRS said. “If you received a PPP loan and included salaries paid in Q2 and / or Q3 2020 as salary costs in support of a loan cancellation request (rather than requesting ERC for those salaries ), and your cancellation request was denied, you can claim the ERC related to those qualifying wages on your 4th Quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return. You can also report on your 4th Quarter Form 941 any ERC attributable to health care expenses that are allowable salaries that you did not include on your 2nd and / or 3rd Quarter Form 941. ”

If a company decides to use this procedure, which is limited to the fourth quarter, it should add the amount of employee retention credit that is attributable to qualifying wages and health expenses from the second and / or third quarter to line 11c or line 13d (as applicable) of their original fourth quarter Form 941 (as well as any other ERCs for qualified wages paid in the fourth quarter).

The company must also include the amount of such skilled salaries paid during the second and / or third quarter (excluding health plan expenses) on line 21 of its original fourth quarter Form 941 ( as well as any qualified salary paid in the fourth quarter)

The business must then enter the same amount on Worksheet 1, Step 3, Line 3a. It should also include the amount of these second and / or third quarter health plan expenses on line 22 of the fourth quarter Form 941 (as well as the health care expenses for the 4th quarter). Then he should enter the same amount on Worksheet 1, step 3, line 3b.

The IRS has recognized that there may be time constraints in doing all of this at this time. “We understand that it might be difficult to implement this late in the deadline for filing your 4th Quarter return,” the IRS said. “You don’t have to use this limited 4th trimester procedure. You can instead choose the regular process for filing an adjusted return or requesting reimbursement for the appropriate quarter to which the additional ERC relates using Form 941-X.

The IRS will likely issue additional and more detailed guidance on this and related issues to address some unanswered questions. “There is an interesting issue for Q4 941 wages that is also not addressed by this guidance,” wrote Ed Zollars, partner at Thomas, Zollars & Lynch, CPA, on his Federal tax news blog for Kaplan Financial Education. “Under the law, all salaries paid in the fourth quarter that meet the criterion of being qualified salary under credit should be used for this, in the absence of an election, not to treat them as a salary for this purpose. So far we have no information on how this election would be done for those 941 fourth quarter wages. ”

He noted that the IRS has yet to issue guidance on how to opt out of employee retention credit for otherwise qualified wages that the employer wishes to release for use under the PPP.

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