Newburg | CPA Tax Brief (8/30/21)

Notice 2021-49 issued by the IRS on August 4, 2021 addresses changes made by the American Rescue Plan Act of 2021 (ARPA) to the Employee Retention Tax Credit (ERTC). The Notice confirms the extended eligibility of the credit for employers that pay qualified wages after June 30, 2021, and before January 1, 2022.

We have included below some of the key highlights within the notice. You can view the entire detailed notice here

Clarification on the Treatment of Tip Wages

  • The Notice clarifies that cash tips count as qualified wages for purposes of the ERTC if all other requirements to treat the amounts as qualified wages are met.
  • In addition, the notice confirms that employers are not prevented from taking both the ERTC and the FICA tip tax credit on the same wages.
  • Any restaurants that filed the ERTC credit without Tips can now file amended returns to claim additional ERTCs

Clarification on Qualified Wages for a “Severely Financially Distressed Employer”

  • The Notice further clarifies the rule surrounding qualified wages for a “severely financially distressed employer”. This would include an employer that experienced a greater-than-90% decline in gross receipts, whether a large or small employer, including any wages paid during the calendar quarter for the same quarter in 2019.
  • “Severely financially distressed employer” wages are any wages paid in the quarter, regardless of the size of the employer.

Recover Startup Businesses

  • Expanding the definition of eligible employers to include “recovery startup businesses,” whom are eligible to received up to $50,000 or credit under the ERTC.
  • A recovery startup business is an employer that does not qualify under either of the first two eligibility requirements and commenced a trade or business after February 15, 2020, for which the average annual gross receipts over a three-year lookback period (prorated for periods less than three years) do not exceed $1 million. While eligible employers generally are limited to a credit of $7,000 per employee per quarter in 2021, a recovery startup business is limited to a total credit of $50,000 per quarter for all employees.

Clarification Regarding Full-Time Employees Vs. Full-Time Equivalents

  • The Notice relays that eligible employers are NOT required to include full-time equivalents when determining the average number of full-time employees.
  • Wages paid to an employee who is NOT a full-time employee may be treated as qualified wages assuming all other requirements are met.
  • The IRS had made it clear that employers must reduce the deduction claimed for employee wages on their federal tax returns by the amount of qualified wages claimed

Treatment of Related Individuals

  • Perhaps the most controversial provision within the Notice pertains to the treatment of owner salaries.
  • The Notice clarifies that, through application of attribution ownership rules, the definition of a “related individual” includes a majority owner (e.g. individual with more than 50% ownership) of a business if the majority owner has a brother or sister, ancestor or lineal descendant. The spouse of a majority owners is also a related individual for purposes of the ERTC if the majority owner has a family member who is a brother or sister, ancestor or lineal descendent.
  • According to the guidance, owner wages will only qualify if the owner has no family other than a spouse in order to treat his or her wages as qualified wages.
  • This excerpt has sparked significant disagreement from Congress. We continue to monitor this guidance as the IRS may revise the position within future guidance.
  • Four distinct examples are provided by the IRS (see page 30 of the full Notice here )

Other Provisions

  • The Notice confirms that inclusion of gross receipts of an acquired business (not owned during a calendar quarter in 2019) continues to apply for employers that purchase businesses in 2021 for purposes of measuring whether or not they meet the decline in gross receipts.
  • Further, an employer that commenced in 2020 should use that quarter to determine whether it experienced a significant decline in gross receipts for the first three quarter of 2021 (compare 4th Quarter 2020 to 4th Quarter 2021).
  • Clarification that the alternative quarter election and usage is not required to be used consistently.

At Newburg | CPA, we can help you navigate the complexities of the Employee Retention Tax Credit. We have a specialized in house ERTC team that can work collaboratively with your payroll company to ensure that your filings are accurate in maximizing the credit opportunities.

Please contact us at 781-884-4100 should you require assistance.