On August 4, the Internal Revenue Service released Notice 2021-49 (the Notice), providing guidance on the changes made by the American Rescue Plan Act (ARPA) to the Employee Retention Credit (ERC) effective for the third and fourth quarters of 2021.
The ARPA created ERC eligibility in the third and fourth quarters of 2021 for Recovery Startup Businesses. The Notice defines a Recovery Startup Business as an employer a) that began carrying on a trade or business after February 15, 2020; b) had average gross receipts of less than $1,000,000 for the three tax years before the quarter in which the ERC is claimed, and c) is not otherwise eligible for the ERC due to suspension of operations or decline in gross receipts. The credit for Recovery Startup Businesses is limited to $50,000 per quarter. The aggregation rules for affiliated entities in the determination of eligibility due to suspension of operations or decline in gross receipts are also applied in the determination of eligibility as a Recovery Startup Business.
The Notice also provides guidance on qualified wages for “severely financially distressed employers”. Businesses with over 500 average full-time employees in 2019 whose gross receipts are less than ten percent of the same calendar quarter in 2019 are not subject to the requirement that qualified wages only apply to those paid when services are not provided in exchange for the third and fourth quarters of 2021. The guidance provided in IRS Notice 2021-23 on the determination of gross receipts for businesses that were not in existence at the beginning of 2019 and the alternative quarter election also applies to the determination of “severely financially distressed employers”.
Along with providing additional guidance, the Notice clarifies concerns over constructive ownership and ERC eligibility for wages paid to owners and their relatives. Certain family members must aggregate their ownership interests to determine whether or not an individual’s ownership percentage is greater than 50%. Wages paid to greater than 50% of owners and certain family members are not qualified wages for purposes of the ERC.
Furthermore, the Notice also reaffirms prior IRS guidance that an employer must reduce its federal tax deduction for wages by the amount of the ERC, regardless of when the credit was actually received. Employers that filed income tax returns and deducted wages without reduction for a credit received in a subsequent period are required to amend their originally filed income tax returns.
Additionally, for the third and fourth quarters of 2021, eligible employers will claim the credit against the employer’s share of Medicare tax. Before July 1, 2021, the credit was claimed against the employer’s share of Social Security tax.
If you need guidance on the next steps applying for the Employee Retention Credit, including maximizing benefit with Paycheck Protection Program First and Second Draw loan forgiveness, we encourage you to reach out to your trusted advisor or contact us at BerganKDV and one of our expert team members can assist you with your tax planning needs.