In a web page posted on January 22, 2021, the IRS has determined that the special fourth quarter Form 941 procedure to claim the Employee Retention Credit will apparently only apply to borrowers who have had their PPP application for forgiveness denied.[1]

IRS Guidance

The page begins by roughly describing the revisions found in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 §206:

Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.

The agency then turns to the special provision in the law that allows certain taxpayers to claim the credit on the fourth quarter Form 941:

If you received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and your request for forgiveness was denied, you can claim the ERC related to those qualified 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 expenses that are qualified wages that you didn't include on your 2nd and/or 3rd quarter Form 941. [2]

The guidance appears to be implementing the revisions to CARES Act §2301(g)(2) for purposes of this special rule (where forgiveness was denied after the wages were used for PPP purposes). As no guidance has yet been released under revised CARES Act §2301(g)(1) (the election to bypass the employee retention credit for otherwise allowable wages, allowing them to be used for PPP purposes), the IRS does not address any such wages in this guidance.

The IRS provides the following procedure to be used by (the likely very limited number of) employers who meet these requirements:

If you choose to use this limited 4th quarter procedure, you should add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of your original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter). You should also:

Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of your original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter)
Enter the same amount on Worksheet 1, Step 3, line 3a.
Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter)
Enter the same amount on Worksheet 1, Step 3, line 3b.[3]

The IRS also addresses the practical problem of attempting to comply with these instructions that were published less than 10 days before the report is due:

We understand this might be difficult to implement so late in the timeframe to file your 4th quarter return. You do not have to use this limited 4th quarter procedure. 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.[4]

Is This All PPP Employers Get for 2020?

Some may worry that this guidance means that employers will have to receive denial of their applications for forgiveness to get an employee retention credit—but that ignores a few key issues.

First, CARES Act §2301(g)(1), as added by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, contains the following language:

(1) IN GENERAL.—This section shall not apply to so much of the qualified wages paid by an eligible employer as such employer elects (at such time and in such manner as the Secretary may prescribe) to not take into account for purposes of this section.[5]

That section clearly indicates that all wages paid in 2020 are first used for the employee retention credit unless this election is made that would free up designated wages to be used for PPP loan forgiveness.

As of the date this is written, the IRS has not released guidance on how to “opt-out” of the employee retention credit for these otherwise qualified wages the employer wishes to “free up” for use towards forgiveness under the Paycheck Protection Program.

Second, a careful reading of the IRS guidance on the fourth quarter 941 program notes it does not provide there is no other way to obtain the credit in 2020 aside from waiting for denial of PPP loan forgiveness. In fact, it does not actually indicate that the IRS would not provide for other circumstances where the special fourth quarter rule might be used, though time is quickly running out for the IRS to provide such additional guidance.

Fourth Quarter Wages

There is an interesting issue for fourth quarter 941 wages that is also not addressed by this guidance. Under the law, all wages paid in the fourth quarter that would meet the test of being qualified wages under the credit would have to be used for that absent an election to not treat them as wages for that purpose. So far, we don’t have any information on how that election would be made for these fourth quarter 941 wages.

As well, since the changes made in §206 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 apply as if they were included in the original CARES Act,[6] it would appear that no 2020 wages paid by an employer that would meet the requirements to be employee retention credit qualified wages would now be eligible to be used for PPP loan relief if the law is to be applied literally—at least not until the IRS releases the method to be used to make the §2301(g)(1) election.

Since that result would seem very clearly contrary to Congressional intent, it appears that we are waiting on the IRS guidance on the election under CARES Act §2301(g)(1). Presumably, the guidance will explain how this election is to be made retroactively at which point taxpayers could then appropriately claim the employee retention credit on certain wages paid in 2020 and apply other wages to PPP forgiveness.

But getting that credit will apparently require filing Forms 941-X for the affected quarter(s).

[1] “Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941,” IRS website, https://www.irs.gov/forms-pubs/didnt-get-requested-ppp-loan-forgiveness-you-can-claim-the-employee-retention-credit-for-2020-on-the-4th-quarter-form-941, January 22, 2021 (retrieved January 24, 2021)

[2] “Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941,” IRS website, https://www.irs.gov/forms-pubs/didnt-get-requested-ppp-loan-forgiveness-you-can-claim-the-employee-retention-credit-for-2020-on-the-4th-quarter-form-941, January 22, 2021

[3] “Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941,” IRS website, https://www.irs.gov/forms-pubs/didnt-get-requested-ppp-loan-forgiveness-you-can-claim-the-employee-retention-credit-for-2020-on-the-4th-quarter-form-941, January 22, 2021

[4] “Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941,” IRS website, https://www.irs.gov/forms-pubs/didnt-get-requested-ppp-loan-forgiveness-you-can-claim-the-employee-retention-credit-for-2020-on-the-4th-quarter-form-941, January 22, 2021

[5] CARES Act §2301(g)(1), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020

[6] Taxpayer Certainty and Disaster Tax Relief Act of 2020 §206(e)