Apr 13 IRS Provides Additional Employee Retention Credit Guidance
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Tax Relief Act), included within the December 2020 Consolidated Appropriations Act, 2021, gave rise to a number of changes to the Employee Retention Credit (ERC). In addition to the removal of the mutual exclusivity between the ERC and Paycheck Protection Program (PPP), the Tax Relief Act extended the eligibility period of the ERC from December 31, 2020 to June 30, 2021. While the American Rescue Plan Act (ARPA) has since extended the ERC eligibility period through the remainder of 2021, the Internal Revenue Service (IRS), via the issuance of Notice 2021-23, has provided Taxpayers with guidance on the ERC for the period of January 1, 2021 – June 30, 2021[1]. Further guidance on the impact of the ARPA on the ERC for the period of July 1, 2021 – December 31, 2021 is anticipated as well.
As a reminder, the Tax Relief Act loosened the strings on the ERC, increasing certain eligibility thresholds as follows:
- ERC Amount
- March 13, 2020 – December 31, 2020: 50% of annual wages up $10,000 per employee
- January 1, 2021 – June 30, 2021: 70% of quarterly wages up to $10,000 per employee
- Significant Decline in Gross Receipts
- March 13, 2020 – December 31, 2020: Greater than 50%
- January 1, 2021 – June 30, 2021: Greater than 20%
- Small Employer vs. Large Employer
- March 13, 2020 – December 31, 2020: 100 or fewer employees
- January 1, 2021 – June 30, 2021: 500 or fewer employees
The release of Notice 2021-23, as referenced above, provided Taxpayers with much-needed guidance on the ERC for the first two quarters of 2021. Notably, Notice 2021-23 includes the following:
- Quarterly Significant Decline in Gross Receipts: Confirms that Q1 2021 and Q2 2021 are viewed on their own. For 2020 ERC purposes, ERC claimants could use the current quarter’s decline, as well as the full following quarter’s decline, until such time as gross receipts were greater than 80% of the corresponding 2019 quarter.
- Prior Quarter Significant Decline in Gross Receipts: Clarifies that the special rule surrounding a 20% decline in the prior quarter applies to both Q1 2021 and Q2 2021 (e., ERC claimants can look to the immediately preceding quarter to determine if a 20% decline has occurred in situations where no such decline occurred in the current quarter).
- New Employers: If an employer was not in existence as of the beginning of a given quarter during calendar year 2019, the employer generally determines whether a significant decline in gross receipts has occurred by comparing Q1 2021 or Q2 2021 to the comparable 2020 quarter (as opposed to the comparable 2019 quarter).
- Qualified Wages: Confirms that the rule limiting the 2020 ERC for large employers to qualified wages paid to an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the full and/or partial suspension or the first day of the calendar quarter in which the employer experienced a significant decline in gross receipts does not apply to Q1 2021 or Q2 2021.
- Advance Payments: Provides a definition and a formula for small employers to calculate the 70% advance payment, as well as the methodology required to file for said advance payment.
In addition to these items, clarifications for the eligibility of certain governmental entities, including educational institutions, as well as the interplay between the ERC and the Work Opportunity Credit, are included in Notice 2021-23 as well.
Sax will continue to update you as further details are made available. Reach out to your Sax advisor or email [email protected] with questions. For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.
[1] Notice 2021-20 provides Taxpayers with guidance on the ERC for the period of March 13, 2020 – December 31, 2020.
