Aug 06 IRS PROVIDES Q3 2021 & Q4 2021 EMPLOYEE RETENTION CREDIT GUIDANCE

The Employee Retention Credit (ERC) has provided significant benefits to qualifying taxpayers for the 2020 and 2021 tax years.  From the Taxpayer Certainty and Disaster Tax Relief Act of 2020’s (Tax Relief Act) removal of the mutual exclusivity between the Paycheck Protection Program (PPP) to the American Rescue Plan Act’s (ARPA) extension the ERC eligibility period through the remainder of 2021, the opportunities to claim the ERC have expanded since it was first issued as part of the CARES Act in March 2020.

The Internal Revenue Service (IRS), via the issuance of Notice 2021-49, has provided Taxpayers with guidance on the ERC for the period of July 1, 2021 – December 31, 2021[1]. Additionally, this notice also provides guidance and clarifications on items impacting both the 2020 and 2021 ERC.

As a reminder, the Tax Relief Act increased certain eligibility thresholds as follows:

• Maximum Credit 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

Notice 2021-49 continues these increased thresholds through the remainder of 2021, while also providing guidance in the following areas:

• Applicable Employment Taxes: For Q3 2021 and Q4 2021, eligible employers claim the ERC against the Employer’s share of Medicare tax, or the portion of the Tier 1 tax under the Railroad Retirement Tax Act that is equivalent to the Medicare Tax.
• Recovery Startup Businesses: For Q3 2021 and Q4 2021, recovery startup businesses, including eligible tax-exempt organizations, may claim an ERC of $50,000 per quarter. Notice 2021-49 defines a “recovery startup business” as an employer:
  • that began carrying on any trade or business after February 15, 2020;
  • with average annual gross receipts of the employer for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000; and
  • that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.

Taxpayers seeking to claim ERC benefit as recovery startup businesses perform the above test on a quarter-by-quarter basis (aggregations rules apply).

• Severely Financially Distressed Employers: For Q3 2021 and Q4 2021, an eligible employer with gross receipts that are less than 10 percent of the gross receipts for the same calendar quarter in calendar year 2019 (or 2020, if the employer was not in existence in 2019) is a severely financially distressed employer. Severely financially distressed employers are excluded from the qualified wage limitations associated with large employers and as such, may claim qualified wages paid to any employee within its ERC base.
• Statute of Limitations: For Q3 2021 and Q4 2021, the statute of limitations has been extended from three years to five years.
• Timing of Qualified Wages Disallowance: Taxpayers that claim the ERC for 2020 or for 2021 must reduce the qualifying wages in the year that the wages are paid or incurred, irrespective of when the filing was done and/or when the ERC was received.
• Related Individuals: For the 2020 and 2021 ERC, the related individual attribution rules have been clarified. Notably, ERC benefits for taxpayers and their spouses that maintain majority control may be limited in situations where lineal, sibling and other family relationships exist, irrespective of whether the related individual actually is employed by or is a direct owner in the taxpayer.  Pay special attention to the examples beginning on page 30.

In addition to these items, clarifications for the coordination between the ERC and other governmental aid programs, including the PPP, Restaurant Revitalization Fund and the Work Opportunity Credit, are included 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; Notice 2021-23 provides Taxpayers with guidance on the ERC for the period of January 1, 2021 – June 30, 2021