August 6, 2021

IRS Issues Updated 2021 ERC Guidance

The unwelcome news that the delta variant has caused an unexpected increase in the number of new COVID-19 infections in Atlanta has stirred up concern amongst business owners. Many are wondering if the restrictive government orders which wreaked havoc on so many last year will make a return. There is a concern about how businesses will manage without the benefit of the Small Business Administration’s (SBA) most popular COVID-19 program, the Paycheck Protection Program (PPP). Since recent updates to the forgiveness process reveal the SBA is looking to shut down the program, it is clear additional funding will not be allocated. Given the confluence of events, many businesses are looking at other funding opportunities such as the Employee Retention Tax Credit (ERC). While not new, there were several changes made in the American Rescue Plan (ARP) which expand eligibility and increase the maximum savings amount. Since the IRS had yet to issue guidance, it left taxpayers with more questions than answers. The good news is earlier this week the IRS issued Notice 2021-49 which provides important updates. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

ERC Recap -What Changed?

• Applicable Taxes – The ERC is a payroll-based tax credit that permits qualifying employers to claim a credit against taxes due. Effective July 1, 2021, employers can claim the credit against the employer’s share of Medicare tax with excess amounts eligible to be refunded.
• Maximum Credit Value – The amount of the credit available for each qualifying employee is still limited to $7,000 per employee, per quarter. However, since the credit can be claimed for the entire year, it means that Atlanta businesses can now receive a maximum annual credit of $28,000 versus the $14,000 under prior rules.
• Recovery Start-Up Business – New for the second half of 2021 is the classification of a recovery start up business. These are businesses that start trade or business after February 15, 2020, for which the average annual gross receipts for the 3-year taxable period 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. For these businesses, the amount of the available credit for the 3^rd and 4^th quarter of 2021 is set at $50,000. This represents a significant savings opportunity for those who are eligible. It is important to note, that the determination on whether an employer qualifies as a recovery start-up business must be made on a quarterly basis.
• Severely Financially Distressed Employers – Under current guidance, a large employer is defined as a company that has 500 or more employees. This distinction is important because it impacts what wages can be classified as qualified wages when determining the credit amount. However, there is a new category of employer called a Severely Financially Distressed Employer. This refers to any company whose gross receipts for the quarter are less than 10% of gross receipts for the same 2019 quarter. These companies are allowed the credit even if employees are performing services despite having more than 500 employees.

Updates from the IRS Guidance

While the ARP made important framework changes, the recently issued IRS guidance provides important information on how credit calculation, qualified wages and more.

• Full-Time Equivalents – Several questions have been posed to the IRS about whether full-time equivalents (FTEs) need to be included when determining whether a company is a large or small employer. In addition, there were also questions about whether wages paid to part-time employees should be treated as qualified wages, assuming all other requirements have been met. The new guidance asserts that FTEs are not to be included by a business when determining whether the employer is large or small. For purposes of qualified wages, the employee status is irrelevant, and wages paid to non-full-time employees can be treated as qualified wages assuming all other requirements have been met.
• Are Tips Qualified Wages? – There have also been several questions presented about whether tips should be included as part of qualified wages. According to the guidance, tips paid in any medium other than cash and cash tips less than $20 should not be included. However, suppose cash tips received by an employee in a calendar month amount to $20 or more. In that case, all tips received by an employee in that month should be included in the wage calculation (assuming all other requirements are satisfied).
• Alternative Quarter Election – The guidance also addresses the concern of many businesses have about using this election method. Some questioned if a business would be required to consistently use the Alternative Quarter Election. The clarification was made that an employer is not required to consistently use this method.
• Gross Receipts Safe Harbor – Existing regulations permit an employer that acquired a business in 2020 to include the gross receipts of the acquired business when determining whether a significant decline had occurred. The safe harbor allows a business to include it in their calculations despite ownership was not established in 2019. However, it was unclear whether the safe harbor would in 2021. The IRS confirmed that it will.
• Businesses Starting Mid Quarter – There have also been several questions about how to calculate the gross receipts of employers that came into existence in the middle of a 2020 calendar quarter. The IRS confirmed the same rules previously used for businesses that came into existence mid-quarter 2019 should be used. This means employers that went into business in the 3^rd quarter of 2020, should use that quarter as the base period to determine whether a significant decline occurred for the first 3 quarters of 2021. For the last quarter, the employer is required to make the evaluation based on the last quarter of 2020.

Contact Us

While the cases of COVID-19 are increasing due to the delta variant, it does not mean Atlanta businesses are not without assistance should restrictions reappear. Despite the absence of the PPP, the changes to the Employee Retention Tax Credit create an expanded savings opportunity for many. If you have questions about the recently issued guidance or need assistance claiming the credit, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.