IRS Issues Guidance on Employee Retention Credit for Second Half of 2021
The IRS has provided additional guidance on the employee retention credit (ERC) program via Notice 2021-49 issued Aug. 4, 2021 and Revenue Procedure 2021-33 issued Aug. 10, 2021.
Notice 2021-49 provides guidance applicable to qualified wages paid during the third and fourth quarters of 2021, including eligibility as a recovery startup business. Notice 2021-49 also provides guidance on several miscellaneous issues applicable to all ERC calculations for 2020 and 2021. Revenue Procedure 2021-33 provides a safe harbor that allows taxpayers to exclude certain items from gross receipts for purposes of determining ERC eligibility.
(Click here for a history of the ERC program including eligibility requirements and computations.)
Recovery Startup Business
Employers are generally eligible to claim the ERC for a quarter during 2020 or 2021 if they meet one of two eligibility tests:
- Their business operations were fully or partially suspended due to a government order relating to COVID-19
- They experienced a decline in gross receipts
Additionally, employers that qualify as a recovery startup business during the third and fourth quarters of 2021 are eligible to claim the ERC for such quarters. In other words, qualification as a recovery startup business is a third eligibility test that is only applicable for the third and fourth quarters of 2021.
Employers qualify as a recovery startup business by meeting all three of the following conditions:
- They began carrying on any trade or business after Feb. 15, 2020
- Average annual gross receipts do not exceed $1,000,000 for the three-taxable-year period ending with the taxable year which precedes the quarter for which the ERC is being claimed
- The employer is not otherwise eligible via the business suspension test or gross receipts test
The basic ERC amount for all eligible employers during 2021 is calculated as 70% of qualified wages. The term qualified wages is limited to $10,000 per employee per eligible quarter. Additionally, employers eligible via the recovery startup business test are also subject to an overall credit limitation of $50,000 per quarter. Eligibility as a recovery startup business is made separately for each quarter. The ERC aggregation rules apply in determining eligibility as a recovery startup business and with respect to the $50,000 overall limitation.
Other Miscellaneous Topics Applicable to the Third and Fourth Quarters of 2021
- Severely Financially Distressed Employer – Larger employers can treat all wages paid to employees as qualified wages for a quarter in which they are a severely financially distressed employer. This requires a 90% decline in gross receipts for the third or fourth quarter of 2021 as compared to the same quarter in 2019. The alternative quarter election does apply to allow classification as a severely financially distressed employer based on the prior quarter gross receipts.
- Coordination With Certain Programs – Wages taken into account for Paycheck Protection Program (PPP) loan forgiveness, shuttered venue operator grants, or restaurant revitalization grants are not qualified wages for purposes of calculating the ERC.
Other Miscellaneous Topics Applicable to All 2020 and 2021 ERC Calculations
- Full-Time Employees – The definition of full-time employee for purposes of determining status as a large or small employer does not include full-time equivalents when determining the average number of full-time employees. However, the employee’s status as a full-time employee is irrelevant in determining the amount of qualified wages paid during periods of eligibility.
- Treatment of Tips – Any cash tips otherwise treated as wages are treated as qualified wages for ERC purposes if all other requirements to treat the amounts as qualified wages are satisfied.
- Section 45B Tip Credit – Employers may claim both the ERC and the Section 45B tip credit on the same wages.
- Timing of Qualified Wages Deduction Disallowance – Employers must reduce their income tax deduction for wage expense by the amount of ERC claimed. This reduction must be made on the income tax return for the year in which the qualified wages were paid or incurred, not the year in which the ERC is claimed and/or received.
- Majority Owner Wages – Generally, constructive ownership and attribution rules will operate to disallow the ERC on wages paid to a majority owner of a corporation, a spouse of such majority owner, and certain relatives of such majority owner. An exception to this disallowance rule may exist when a majority owner and spouse have no other relevant family members.
- Amended Returns – If an employer files an adjusted or amended return to reflect the clarifications made by Notice 2021-49, late payment penalties will not be imposed if the employer can show reasonable cause and not willful neglect for a failure to timely pay or deposit tax.
The Gross Receipts Safe Harbor of Revenue Procedure 2021-33
Revenue Procedure 2021-33 allows employers a safe harbor, solely for purposes of determining ERC eligibility via the decline in gross receipts test, to exclude the following items from gross receipts:
- The amount of forgiveness of a PPP loan
- Shuttered venue operator grants
- Restaurant revitalization grants
On Aug. 10, 2021, the Senate passed the $1 trillion Infrastructure Investment and Jobs Act. The infrastructure bill terminates the ERC at the end of the third quarter of 2021. Thus, if this provision is eventually passed into law, the ERC will not be available for the fourth quarter of 2021 except for wages paid by an eligible recovery startup business. The bill is pending action by the House of Representatives and there is a possibility the House will make substantive changes to the infrastructure bill. It is uncertain at this time the extent to which early termination of the ERC will become law. For now, the ERC is still available through the fourth quarter of 2021.
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We will continue to monitor the evolution of the ERC program and will keep you apprised of changes and updates to this and other COVID-19-related legislation. Please reach out to your KSM advisor with questions or complete this form.
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