Erc Clarification From Irs

The Internal Revenue Service (IRS) has provided some answers to unanswered questions regarding the employee retention credit, such as the inclusion of COVID-19 relief funds in gross receipts and the treatment of tips in the calculation of qualified wages. These are just two examples of the issues that have been addressed.

Editor’s note: This article was initially published in August 2021, shortly after the Internal Revenue Service (IRS) released Revenue Procedure 2021-33 and Notice 2021-49 for the very first time. This article has been updated to reflect the fact that the expiration date of the employee retention credit has been accelerated up as a result of the adoption of the Infrastructure Investment and Jobs Act.

The Internal Revenue Service (IRS) has released two new pieces of guidance that clear several questions that have been plaguing taxpayers who have been trying to claim the employee retention credit (ERC) on their payroll tax returns for the years 2020 and 2021. Both of these pieces of guidance can be found here and here. This revised guidance clarifies eligibility conditions and calculations for the credit through the third and fourth quarters of 2021. It also provides answers to some questions that date back to the implementation of the initial credit in March 2020. This was place at the same time that legislation was being introduced in Congress to terminate the ERC for the vast majority of businesses on September 30.

Forgiveness of PPP loans, grants, and contributions counted as “gross receipts”

Since the ERC was initially adopted in the year 2020, taxpayers have been requesting for clarity on the impact that other COVID-19 relief would have on the gross receipts of a company. There are many routes that employers might qualify to become eligible for the ERC. A “substantial drop in gross receipts” must have been suffered by the employer between the quarter in which eligibility is being sought and the same quarter in 2019, according to one of the methods. Prior to the release of this guidance by the IRS, taxpayers were unsure as to whether or not COVID-19 relief amounts received from the government, such as loan forgiveness under the Payroll Protection Program (PPP), grants to shuttered venue operators, and grants to revitalize restaurants, should be included in “gross receipts” when calculating a “significant decline.”

The Internal Revenue Service (IRS) developed Revenue Procedure 2021-33, which included a special safe-harbor rule. This rule enables taxpayers to exclude amounts received from COVID-19 relief programs listed above from the calculation of “gross receipts,” which is done solely for the purpose of determining eligibility for the Enhanced Recovery Credit (ERC). The safe harbor makes it very clear that the sums are still recorded as gross receipts for all other tax reasons; this is the case notwithstanding the fact that the safe harbor is in place. Due to the fact that the guidance does not name any COVID-19 alleviation programs other than the three that have been presented above, it is implied that grants or loan forgiveness from any other program will continue to count as gross receipts for the ERC.

The Internal Revenue Service (IRS) developed a unique safe-harbor rule that enables taxpayers to exclude funds received through COVID-19 assistance programs. This rule is a special safe-harbor rule.

Tips received by employees are considered “qualified wages.”

In Notice 2021-49, the Internal Revenue Service (IRS) provided clarification on a number of issues that had previously left taxpayers seeking the ERC unsure about their eligibility. The notification clarified that employers are able to claim both an ERC and a FICA tip credit for the same tips, and that tips received by workers count as “qualified wages” for the purpose of determining the credit amounts that employers are eligible to claim.

The announcement clarified that employers can use tips earned by workers toward “qualified wages” when calculating the amounts of credit to be awarded.

The manner in which owner wages are handled

Wages given to individuals who control more than fifty percent of a business will not be treated as favorably under the new guidance. In general, members of the ERC are not permitted to include anyone who is connected to a person who owns more than 50 percent of the company, either by blood or by marriage. When identifying who owns more than fifty percent of a business, the laws for constructive ownership also come into play. However, unless the regulations of constructive ownership are interpreted in a very broad sense, the owner is not directly disqualified from the ERC under the rules. The notification did just that, and it came to the conclusion that the owner cannot be included in the ERC if the individual in question has a live brother, spouse, ancestor, or lineal descendant (because that living family member will constructively own more than 50 percent of the business and the legal owner will be related to the constructive owner). Therefore, wages paid to any member of the family of a person who owns more than fifty percent of the company, including the owner himself, are often going to be excluded from the calculation of the ERC.

The effect of income tax

A time problem pertaining to modifying pay expenditures for the ERC is also addressed and clarified by the announcement. Employers are prohibited from deducting from their taxable income any wages that were factored into the ERC calculation up to the amount of the ERC. According to the newly issued guidance, an employer that deducted wages that were also the basis of an ERC claim is required to adjust income in the year that the wages were paid rather than in the year that the law was adopted or the refund claim was submitted. Therefore, if an employer submits a refund claim for an ERC for a quarter in 2020, the adjustment to taxable income equal to the ERC must also be included on the employer’s federal income tax return for 2020. This is the case regardless of whether the refund claim is made in 2021 or later. Businesses who failed to include any essential revisions on their original 2020 tax forms will be required to file amended returns.

ERC guidance for the third and fourth quarters

Additionally, the notice offers details on two areas of growth that will be carried out by the ERC during the third and fourth quarters of 2021. “Recovery beginning businesses” are now eligible for the ERC, and “severely distressed employers” are given the opportunity to increase the calculation of wages that they include toward the ERC amount. The term “recovery startup businesses” refers to companies that did not have yearly gross receipts of more than one million dollars when they first opened their doors after February 15, 2020. If they are eligible under the law, they will calculate the ERC using the same definition of “qualified wages” that will be used by other eligible employers. This will determine whether or not they are entitled to the credit. The ERC for these businesses is capped at a quarterly total of fifty thousand dollars.

According to the provisions outlined in Notice 2021-49, some companies may be considered “severely distressed employers” during the third and fourth quarters of 2021 if they incur a reduction in gross receipts of at least 90 percent as compared to 2019. (see below for subsequent expiration of fourth quarter). The notice outlines a procedure for severely distressed businesses to follow in order to have all wages paid to employees during a given quarter be considered “qualified wages” for the purposes of calculating the ERC. It also provides examples of businesses that qualify the criteria for being severely distressed.

The end of the ERC’s expiration

The expiration on which the ERC would have been allowed to expire was moved forward from December 31, 2021 to September 30, 2021 when the Infrastructure Investment and Jobs Act (the Infrastructure Act) was accelerated into law. Up until the 31st of December in 2021, the ERC may be claimed by no other businesses than recovery starting companies.

The Infrastructure Act hastens the expiration on when the employee retention credit will expire.

The employee retention credit, often known as the ERC, assisted businesses in meeting pandemic payrolls. However, the ERC initially conflicted with other programs, and its frequent revisions left prospective recipients bewildered. Even though it will no longer be valid after September 2021, certain employers have to think about filing a retroactive claim.

The Infrastructure Investment and Jobs Act (the Infrastructure Act) contains a clause that moves forward the expiration on which the employee retention credit (ERC) will expire for the majority of employers, moving it from the 31st of December in 2021 to the 30th of September in 2021. The ERC was first established in March 2020 with the intention of providing assistance to employers that were adversely impacted by the COVID-19 epidemic. It underwent revisions in December 2020 and once again in March 2021. Because of its brief existence and the various changes that were made to it, it’s possible that some employers skipped out on opportunities to claim the ERC. As soon as the provision is no longer in effect, the time limit for employers to revise their prior payroll tax filings in order to claim the credit will start ticking down.

The brief and precarious existence of the ERC

Employers who acquired a loan under the Payroll Protection Program were not eligible for access to the ERC under the law as it was initially adopted (PPP). This restriction was later retroactively modified so that employers who had gotten a PPP loan could claim the ERC as long as it was not based on any wages that were paid with proceeds of a PPP loan that had been forgiven. Prior to this modification, employers who had gotten a PPP loan were not allowed to claim the ERC. Because of the large amount of information that employers were required to manage throughout the pandemic, many of the businesses that could have benefited from the expanded availability may have been unaware of the news. The modification significantly increased the number of companies that were eligible for the ERC. Employers that have not previously claimed the ERC should go through these charts to determine whether or not they may be qualified to update their payroll tax filings in order to take advantage of the credit.

The ERC was modified in the middle of its implementation, which resulted in somewhat different calculations of the credit that may be awarded to qualifying employers in each year. For the year 2020, the credit is equal to fifty percent of up to ten thousand dollars in wages that are qualified per employee for the year, which is five thousand dollars. In 2021, it will be applicable to as much as 70 percent of each employee’s qualifying wages up to a maximum of $10,000 for each eligible quarter. Due to the fact that the ERC will cease to exist at the end of the third quarter of 2021 as a result of the Infrastructure Act’s accelerated expiration, this amounts to up to $7,000 per employee, every quarter in 2021, for a total of $21,000.

The modification made a considerable increase in the number of companies that qualified for the ERC; nevertheless, it is possible that many of the businesses that could have benefited from the extended availability were unaware of the change.

Recovery new businesses are eligible for an additional quarter of ERC funding.

While the majority of the ERC eligibility calculations focused on businesses that saw declines in gross receipts compared to 2019, the law allowed businesses that started operations on or after February 15, 2020 to claim the credit if their average annual gross receipts remained less than $1 million. This was provided that the business had been in operation for less than five years. According to the law, these businesses, which are referred to as “recovery startup businesses,” were first eligible for the ERC beginning on July 1, 2021, and they will continue to be eligible to claim the ERC throughout the fourth quarter of 2021.

Instructions for Making a Claim for the ERC: Retroactive Claims Will Be Accepted

The initial claim for the ERC must be made by employers on their Form 941 (Employer’s Quarterly Tax Return), which is due at the conclusion of each calendar quarter. That procedure will be followed by recovery startup businesses when they make their ERC claims in the fourth quarter. Even though the ERC is often inaccessible during the fourth quarter, it is still possible to submit new claims for earlier quarters by using a modified Form 941 (Form 941-X) for such quarters. Generally speaking, businesses have the ability to claim refunds for taxes that were overreported on a previously filed Form 941 by submitting an amended form within three years of the date the original was filed or two years from the date the tax that was reported on the original return was paid, whichever comes later. This must be done within the time frame specified by the IRS.

Employers that may have been unaware of the ERC now have some time to examine their quarterly returns for the years 2020 and 2021 to determine whether or not there is a potential for extra cost savings as a result of this program. Concerns regarding the eligibility of a business based on either the gross receipts test or the business suspension test are two of the most common reasons why the ERC has been overlooked in previous quarters. Uncertainty regarding the overlap between the ERC and the PPP loan program is another common reason.

Our ERC specialists are able to assist you.

Few tax measures have had such a brief history and been as subject to revision as the ERC. When it comes to precisely calculating the value of the credit for a business, there are a lot of moving components to take into consideration, as well as larger-scale eligibility issues that might have an impact on individual members of aggregated groups. Please get in touch with a member of the Plante Moran advisory team if you would like further information on how the ERC can be beneficial to your business.

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