Filed under: Tax Compliance & Planning
In early August, the IRS issued two pieces of guidance on the Employee Retention Credit (ERC) – Notice 2021-49 and Revenue Procedure 2021-33. This guidance includes answers to your top questions, including:
- Whether PPP loan proceeds are included in the gross receipts calculation;
- Whether S-corporation owners are eligible for the ERC;
- When the ERC credit is included on your income tax return; and
- What method of accounting to use when calculating a decline in gross receipts.
Also included is a new provision that allows for double dipping on wages for recipients of Shuttered Venue Operator Grants and Restaurant Revitalization Fund Grants. Additional guidance on Recovery Startup Businesses is also provided.
Below is a summary of Notice 2021-49 and Revenue Procedure 2021-33. This new guidance may affect your previously filed ERC claims or income tax returns. If you think your previously filed claims or tax returns need to be revised, please contact your advisor at Clark Nuber for further assistance.
| Summary of Change | Applicable Time Period | Explanation | Reference |
|---|---|---|---|
| Gross Receipts Does Not Include PPP, RRF, and SVOG Programs* | 2020 and 2021 | Any funds an employer receives from a PPP loan, SVOG program, or RRF program are not included in the gross receipts calculation for ERC eligibility when meeting certain requirements. | Rev. Proc. 2021-33, Section 3 |
| Gross Receipts Calculated on Same Method as Tax Return | 2020 and 2021 | When calculating gross receipts for ERC eligibility, employers should use the same method of accounting used for their income tax return. This applies to both for-profit and tax-exempt organizations. | Rev. Proc. 2021-33, Section 2.06 |
| Wages Paid to Majority Owners Generally Not Eligible for ERC | 2020 and 2021 – all quarters | Wages paid to >50% owners, including spouses, are only eligible for the ERC if the >50% owner has no living ancestors or lineal descendants. | Notice 2021-49, Section IV.D |
| Wage Deduction Required on Income Tax Return in Year Wages are Paid** | 2020 and 2021 – all quarters | ERC wages are treated as a reduction to an employer’s wage expense in the year the wages are paid, not the year the ERC claim is filed. If the employer’s income tax return has been filed for the year where a retroactive claim is made, an amended return or administrative adjustment request is required. | Notice 2021-49, Section IV.C |
| Double Dipping of Wages for SVOG and RRF Recipients Permitted*** | 2020 – all quarters; 2021 – Q1 and Q2 only | Recipients of a Shuttered Venue Operator Grant (SVOG) or Restaurant Revitalization Fund Grant (RRF) may allocate the same wages to the ERC and these two COVID relief programs. Double dipping on PPP wages is still not permitted. | Notice 2021-49, Section III.F |
| Alternative Quarter Election for Gross Receipts Calculation is Not Binding | 2021 – all quarters | If an employer is eligible for the ERC using the alternative quarter lookback method, it is not required to continue using this method in subsequent quarters. | Notice 2021-49, Section IV.E |
| Definition of Full-Time Employee Does Not Include Equivalents | 2020 and 2021 – all quarters | Part-time employees are disregarded when calculating the average full-time employees for 2019 to determine if the employer is a small or large employer. | Notice 2021-49, Section IV.A |
| Wages Paid to Part-Time Employees are Qualified Wages | 2020 and 2021 – all quarters | Wages paid to part-time employees are qualified wages and eligible for the ERC, despite part-time employees being disregarded for purposes of determining a small or large employer. | Notice 2021-49, Section IV.A |
| Cash Tips are Qualified Wages | 2020 and 2021 – all quarters | If cash tips are included in taxable wages (required when $20 or more in a month), the cash tips are qualified wages and eligible for the ERC. | Notice 2021-49, Section IV.B |
| Double Dipping Permitted on 45B Tips | 2020 and 2021 – all quarters | Tips earned by employees of food and beverage establishments that are utilized for the FICA tip credit are also eligible for the ERC. | Notice 2021-49, Section IV.B |
| Tax-Exempt Organizations May Be a Recovery Startup Business | 2021 – Q3 and Q4 only | The special ERC for Recovery Startup Businesses includes both for-profit businesses and tax-exempt organizations. | Notice 2021-49, Section III.D |
| Recovery Startup Businesses May Count All Wages for ERC | 2021 – Q3 and Q4 only | Recovery Startup Businesses use the same definition of qualified wages as a small employer for purposes of the ERC. This means all wages paid to employees are qualified wages (subject to the $10,000 per person limit). | Notice 2021-49, Section III.D |
| Large Employers that Qualify as Severely Financially Distressed May Count All Wages for ERC | 2021 – Q3 and Q4 | Large employers considered a Severely Financially Distressed Employer may calculate qualified wages in the same way as small employers. This means all wages paid to employees are qualified wages (subject to the $10,000 per person limit) rather than only wages paid to people not working. | Notice 2021-49, Section III.E |
**Find out more in our article, Filed Your 2020 Tax Return Already? An Amended Return May Be Required If You Claimed a 2020 Employee Retention Credit.
*** Find out more in our article, Double Dipping Opportunities for RRF and SVOG Recipients Claiming the Employee Retention Credit.
Have questions? Contact a Clark Nuber professional for further assistance.
©2021 Clark Nuber PS. All rights reserved.
