The IRS recently issued additional guidance on how employers can claim the employee retention credit (ERC). At the same time, the federal infrastructure bill making its way through Congress proposes the elimination of the ERC this fall.
Grassi’s Tax Services advisors are monitoring these developments closely. Here’s what you need to know.
Proposed Infrastructure Bill
The widely publicized infrastructure bill (H.R. 3684) passed the Senate and is headed to the House. In its current form, the legislation would end the ERC early, making wages paid after Sept. 30, 2021, ineligible for the credit. The only exception would be for wages paid by an eligible recovery startup business (RSB).
An RSB is an employer that commenced a trade or business after February 15, 2020 and had annual gross receipts of $1 million or less over a three-year lookback period (prorated for fewer than three years).
Safe Harbor for Claiming the ERC
Meanwhile, the IRS issued Rev Proc 2021-33 to allow employers to exclude the following amounts from gross receipts when determining their eligibility for the ERC:
- Amount of forgiveness of a Paycheck Protection Program (PPP) loan
- Shuttered Venue Operators Grants
- Restaurant Revitalization Grants
The above amounts can be excluded from gross receipts for ERC purposes only, and not for any other federal tax purpose.
2021 Employee Retention Credit
In Notice 2021-49, the IRS answers questions about the employee retention credit (ERC) offered under the American Rescue Plan Act of 2021 (ARPA), which extended the credit through the end of 2021.
Recovery Startup Businesses
RSBs did not qualify for the ERC under the CARES Act or Consolidated Appropriations Act, 2021, but under the ARPA, they can qualify for up $50,000 per quarter for all employees.
The Notice clarifies the following for RSBs:
- For eligibility purposes, IRC Section 162 determines the date of commencement, which is the date on which the business functions as a going concern and performs the activities for which it was organized.
- Tax-exempt organizations that meet the operations and gross receipt requirements may qualify as RSBs.
- Qualified wages of an RSB are all wages paid by an RSB that is a small employer.
The Notice also answers questions on qualified wages for other eligible employers:
- For “severely financially distressed” employers” (i.e. experienced more than 90% decline in gross receipts), the credit is available only for qualified wages the employer paid in the same quarter it claims the credit.
- For the second half of 2021, the ERC does not apply to qualified wages taken into account as payroll costs in connection with a Shuttered Venue Operators Grant or a Restaurant Revitalization Grant.
Other ERC Issues
The Notice also addresses other areas of uncertainty surrounding the ERC:
- Full-time equivalents are not required to be included in the count of full-time employees for purposes of determining ERC eligibility. Wages paid to an employee who is not full-time, however, may be treated as qualified wages if all other requirements are met.
- Cash tips treated as either IRC Section 3121(a) wages or IRC Section 3231(e)(3) compensation are treated as qualified wages, and eligible employers can receive both the ERC and the IRC Section 45B credit for the same wages.
- Taxpayers that claim ERCs on amended Forms 941 after filing their federal income tax return should file an amended federal income tax return or administrative adjustment request if the appropriate disallowance of employer’s federal income tax deduction for qualified wages was not taken on the original return.
- If employers use the alternative quarter election (i.e. comparing gross receipts to the prior quarter instead of current quarter), they do not need to consistently use that election in every other quarter.
- Qualified wages paid to owner-employees and their spouses are determined by whether or not they have other family members who are treated as owners under the IRC Section 267(c) attribution rules.
Grassi’s Tax Advisors will keep you updated on new developments and guidance on employee retention credits and the federal infrastructure bill.