Earlier this month, the IRS released Notice 2021-49 and Revenue Procedure 2021-33, to provide additional guidance for employers claiming the Employee Retention Credit (ERC) in 2020 or 2021. This guidance provided answers to several unresolved issues including:
- Majority Owners: The wages paid to a majority (over 50%) owner and their spouse are not qualified wages if the owner has any living siblings, ancestors or lineal descendants. The outcome does not change if these relatives do not work for the employer or do not have an ownership interest in the employer. The IRS position is based on application of the “ownership attribution rules”.
- Under previous guidance wages paid to specified relatives of the majority owner were not considered as qualified wages. These relationships include: children, grandchildren, siblings, parents, grandparents, nieces, nephews, aunts and uncles, in-laws, and someone who shares the taxpayer’s household (a spouse is specifically excluded from this definition).
- Gross Receipts: When calculating the required decline in gross receipts amounts received from a forgiven PPP loan, Restaurant Revitalization Grant or Shuttered Venue Operators Grant are not included as gross receipts.
- Timing of wage expense reduction: Wage expense is to be reduced in the period the wages were paid not in the period the taxpayer receives the benefit of the ERC. As a result If a taxpayer files an amended 2020 Form 941X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to retroactively claim the ERC, the taxpayer must file an amended 2020 income tax return or administrative adjustment request (for partnerships) to reduce the wage expenses claimed.
- Election to use prior quarter gross receipts: To determine eligibility for the ERC employers may qualify by having a decline in gross receipts comparing the current quarter to the same quarter of 2019. For 2021 employers can elect to test the current quarter by doing the comparison using gross receipts from the immediately preceding quarter. The IRS has clarified that this election can be made each quarter and once made the employer does not need to use this method in future quarters.
- Determination of 2019 Employees: The definition of qualified wages depends on if the employer qualifies as a “large” or “small” employer. The IRS confirmed that this is determined by the average number of full-time employees working in 2019 (working 30 hours or more per week) not by calculating full-time equivalent. Note–both full and part-time employees can be eligible for the credit.
- Definition of a “recovery start-up business“: Any employer that began carrying on a trade or business after February 15, 2020, with average annual gross receipts for the three prior tax years of less than $1 million. A qualified employer can only claim the ERC in Qtr 3 and Qtr 4 of 2021.
- Eligible employers can claim the ERC in Quarter 3 or 4 of 2021 even if they have not suffered a decline in gross receipts and have not been subject to a full or partial shutdown due to a government order.
- Non-profit entities (501(c)) can qualify as “recovery start-up business” eligible to claim the ERC.
- Interaction with Employer Tax Credit for FICA: Employers may claim both the ERC and the IRC §45B Employer Tax Credit for FICA paid on tip income.
- Business acquisitions: The safe harbor that allows an employer that acquires a business in 2020 to use the acquired business’s 2019 gross receipts for purposes of determining whether there is a significant decline in gross receipts applies to employers that acquire a business in 2021 as well.
Note: the Infrastructure Investment and Jobs Act, passed by the Senate on August 10, 2021, would repeal the Employee Retention Credit for the last quarter of 2021 for all businesses (except recovery start-up businesses). The legislation now goes to the House, who could vote as early as the end of August.
As always, please contact us if you have any questions about the recent changes to the Employee Retention Credit, or any other pandemic-related tax credits.