On August 4, 2021, the IRS launched Discover 2021-49 that gives extra steerage concerning claiming the Worker Retention Credit score (ERC) for employers who pay certified wages after June 30, 2021, and earlier than January 1, 2022 [IR 2021-165, Notice 2021-49].
The Worker Retention Credit score is a refundable tax credit score towards sure employment taxes of the certified wages an eligible employer pays to workers after March 12, 2020, as much as sure limitations. Established underneath the Coronavirus Support, Aid and Financial Safety (CARES) Act, the ERC was on account of expire on December 31, 2020.
The Consolidated Appropriations Act (CAA) of 2021, prolonged the ERC via June 30, 2021. The CAA additionally expanded the ERC price of credit score from 50% to 70% of certified wages.
The American Rescue Plan Act (ARPA) extends the ERC from June 30, 2021, till December 31, 2021. ARPA additionally:
- reduces the required year-over-year gross receipts decline from 50% to 20%;
- gives a protected harbor that permits employers to make use of prior quarter gross receipts to find out eligibility;
- will increase the restrict on creditable wages from $10,000 in whole to $10,000 per calendar quarter (i.e., $10,000 for first quarter 2021 and $10,000 for second quarter 2021); and
- will increase the 100-employee delineation for figuring out the related certified wage base to employers with 500 or fewer workers (which means wages qualify for the credit score even when the worker is working) (small eligible employer definition).
Our nearer look examines how the Discover addresses questions that the Treasury Division and IRS have been requested concerning the ERC
Definition of full-time worker.
The Discover addresses whether or not “full-time equivalents” (Code Sec. 4980H(c)(2)(E)) are counted in figuring out whether or not an eligible employer is a big eligible employer vs. a small eligible employer. The Discover clarifies that “full-time equivalents” don’t must be included in figuring out the common variety of full-time workers. Nonetheless, when it comes to “certified wages,” an worker’s standing as a full-time worker is “irrelevant and wages paid to an worker who just isn’t full-time could also be handled as certified wages if all different necessities to deal with the quantities as certified wages are happy.”
Remedy of ideas as certified wages.
The Discover clarifies that certified wages are restricted to wages as outlined underneath Code Sec. 3121(a) and compensation underneath Code Sec. 3231(e) together with certified well being plan bills, and for calendar quarters in 2021, remuneration paid for companies to sure governmental employers. The discover explains that money ideas of $20 or extra per 30 days are handled as “wages” or “compensation” underneath Code Sec. 3121(a) and Code Sec. 3231(e), and subsequently could also be handled as certified wages if all different necessities are happy.
Part 45B credit score.
The IRS has obtained questions concerning whether or not an employer could declare the ERC and Part 45B credit score on the identical wages. The Part 45B credit score could also be claimed on the employer’s share of FICA taxes on extra ideas obtained by its workers “in reference to the offering, delivering, or serving of meals or drinks for consumption if the tipping of workers delivering or serving meals or drinks by prospects is customary” (Code Sec. 45B(a); Code Sec. 45B(b)(2)). The credit score is the same as the quantity of FICA tax paid by the employer on the portion of ideas exceeding the quantity handled as wages for the aim of satisfying federal minimal wage necessities (Code Sec. 45B(b)(1)). The Discover states that there isn’t any provision in CARES Act or subsequent laws that stops the receipt of each the ERC and the Code Sec. 45B credit score for a similar wages, subsequently employers are permitted to assert each the ERC and Code Sec. 45B credit score for a similar wages.
Timing of certified wages deduction disallowance.
Notice 2021-20 defined that underneath Code Sec. 3134(e) and Part 2301(e) of the CARES Act, an employer’s deduction for certified wages, together with certified well being plan bills, is lowered by the quantity of the worker retention credit score. The IRS clarified that when a taxpayer claims a retroactive credit score to a retroactive adjustment reminiscent of eligibility of PPP debtors to assert the ERC, or information an amended employment tax return to assert the ERC, the taxpayer ought to file an amended federal revenue tax return or administrative adjustment request (AAR), if relevant, for the taxable 12 months by which the certified wages have been paid or incurred to appropriate any overstated deduction taken for those self same wages on the unique return. Code Sec. 280C(a) requires tracing to the precise wages producing the relevant credit score. To fulfill this tracing requirement, the taxpayer should file an amended return or AAR, as relevant.
Wages of majority house owners and spouses.
The discover addresses whether or not wages paid to an worker who owns greater than 50% (majority proprietor) of the worth of an organization could also be handled as certified wages, in addition to whether or not wages paid to a partner of a majority proprietor could also be handled as certified wages.
Typically, the CARES Act gives related guidelines for ERC functions to Code Sec. 51(i)(1) that relate to the Work Alternative Credit score. The Discover clarifies if the majority proprietor of an organization has no brother or sister (whether or not by complete or half-blood), ancestor, or lineal descendant as outlined in Code Sec. 267(c)(4), then neither the bulk proprietor nor the partner is a associated particular person inside the which means of Code Sec. 51(i)(1) and the wages paid to the bulk proprietor and/or the partner are certified wages for functions of the worker retention credit score, assuming the opposite necessities for certified wages are happy. The Discover gives numerous examples to make clear this problem, together with an instance the place wages of a majority proprietor or partner might not be handled as certified wages.
Instance: Company D is owned 34% by Particular person L, 33% by Particular person M, and 33% by Particular person N. Particular person L, Particular person M, and Particular person N are siblings. Company D is an eligible employer with respect to the primary calendar quarter of 2021. Particular person L, Particular person M, and Particular person N are workers of Company D. Pursuant to the attribution guidelines of Code Sec. 267(c), Particular person L, Particular person M, and Particular person N are handled as 100% house owners. Particular person L, Particular person M, and Particular person N have the connection to one another described in Code Sec. 152(d)(2)(B). Accordingly, Company D could not deal with as certified wages any wages paid to Particular person L, Particular person M, or Particular person N.
Different quarter election for calendar quarters in 2021.
As offered in Notice 2021-23, the dedication of whether or not an employer is an eligible employer relies on a decline in gross receipts is made individually for every quarter. Employers usually are not required to make use of the choice quarter election persistently. For instance, an employer could also be an eligible employer on account of a decline in gross receipts for the second quarter of 2021 if its gross receipts for the second quarter are equal to 75% of its gross receipts within the second quarter of 2019 (i.e., the employer doesn’t depend on the choice quarter election for the second quarter); the employer may then use the choice quarter election to be an eligible employer for the third quarter of 2021.
Gross Receipts Secure Harbor in Discover 2021-20.
The Discover explains that guidelines offered underneath Notice 2021-20 for figuring out gross receipts for an employer that got here into existence in 2019 could also be utilized for employers who got here into existence in the course of 2020. For instance, an employer that got here into existence within the third quarter of 2020 ought to use that quarter as the bottom interval to find out whether or not it skilled a big decline in gross receipts for the primary three quarters in 2021 and will use the fourth quarter of 2020 for comparability to the fourth quarter of 2021 to find out whether or not it skilled a big decline in gross receipts.
IRS payroll business name.
In an August 5 IRS payroll business name, the IRS highlighted two forms of ERC eligible companies:
- Restoration startup companies. The IRS famous within the name that present provisions don’t clarify what are certified wages for claiming the ERC by a restoration startup enterprise. A restoration startup enterprise is one which: (1) started operations after February 15, 2020 whose common annual gross receipts for a three-taxable-year interval ending with the taxable 12 months which precedes such quarter doesn’t exceed $1,000,000, and (2) experiences a full or partial suspension of operations on account of a governmental order or experiences a big gross receipts decline. A spokesperson for the IRS clarified that if a enterprise is a restoration startup enterprise and a small eligible employer (Code Sec. 3134(c)(3)(A)(ii)), it might deal with all wages paid to an worker throughout the quarter as certified wages. Additional, aggregation guidelines do apply in figuring out whether or not a enterprise is a restoration startup enterprise. Lastly, the IRS has decided it’s acceptable for a tax exempt (Code Sec. 501(c)) group to qualify as a restoration startup enterprise if it meets all necessities.
- Severely financially distressed employers. The IRS defined that severely financially distressed employers could declare the ERC for certified wages paid in the identical quarter they’re claiming the credit score.
An IRS spokesperson famous that the IRS is conscious that the infrastructure invoice (H.R. 3684) incorporates a provision that may successfully lower off the ERC after the third quarter apart from restoration startup companies. It’s monitoring the state of affairs.