How Notice 2021-49 & Revenue Procedure 2021-33 (And The New Infrastructure Bill) Will Impact Your ERC
Those waiting on additional employee retention credit (ERC) guidance got their wish on Aug. 4, when the Treasury Department and IRS released Notice 2021-49, which addresses the issue of wages paid to employee/owners and their spouses while amplifying guidance that was already provided in Notice 2021-20 and Notice 2021-23. Then, the Treasury and IRS upped the ante on Aug. 10, and issued Revenue Procedure 2021-33, which “provides a safe harbor permitting employees to exclude certain amounts from gross receipts solely for determining eligibility for the ERC.” This article will explain what these “new releases” mean and how to navigate the ever-changing waters.
Listen to episode 294, “Tax Tips From ‘Taxene’ To Help You Close Out 2021,” on unsuitable on Rea Radio, Rea & Associates award-winning weekly podcast for business owners.
Notice 2021-49: An Overview
As referenced above, Notice 2021-49 directly address the issue of wages paid to employee/owners and their spouses. Specifically, the notice states that, because of the application of the attribution rules of 267(c), in most cases, majority owners and their spouses will fall under the definition of related individuals. Therefore wages paid to these individuals would not qualify for the ERC. For further discussion and examples, take a look at Notice 2021-49 and scroll through to page 25.
Additional ERC Guidance Outlined
Notice 2021-49 also addresses a number of other items. These are listed below.
- Expanded guidance related to the new “recovery startup business” and “severely financially distressed business” rules that are in effect for Q3/Q4 2021.
- Additional guidance on coordination with other government programs, namely the shuttered venue grants and restaurant revitalization grants (no double dipping on wage expense).
- Confirmation that the election to use an alternative quarter for determination of significant decline in gross receipts in 2021 is a quarter by quarter election, so a taxpayer may be able to qualify for the ERC in two quarters by using the same calendar quarter gross receipts.
- For example, if Q2 2021 vs. Q2 2019 shows a decline greater than 20 percent, a taxpayer would qualify for Q2 as well as Q3 if they elected to use the immediately preceding quarter.
- Confirmation that tips treated as W2 wages qualify for purposes of the ERC.
- Clarifies that the federal tip credit under section 45B is not impacted by the ERC, meaning both the ERC and tip credit can be claimed on the same wages/tips.
- For the determination of large employer status, the average number of full time employees does not include “full time equivalents.”
- Timing of the deduction disallowance under 280(c).
- For income tax purposes, the adjustment to wage expenses should be made in the year the wages were incurred. So, for 2020 ERC claims, the adjustment should be made on the 2020 tax return. If the return was filed prior to the ERC claim, the notice confirms that an amended return (or AAR) should be filed to adjust for the disallowed deduction.
Read Also: Tax Changes On The Horizon
But Wait, There’s More: Revenue Procedure 2021-33
Revenue Procedure 2021-33 introduced a safe harbor ensuring that the following items will not be included in gross receipts for purposes of determining ERC eligibility.
- PPP Loan Forgiveness
- Shuttered Venue Operator Grants
- Restaurant Revitalization Grants
This guidance will apply to for-profit and non-profit employers. According to the guidance, the safe harbor is deemed to be made simply by not including these amounts in your ERC eligibility calculations and must be applied consistently for all quarters.
The Rev. Proc. goes on to point out that this exclusion is solely for purposes of determining ERC eligibility, and that these items would still be included in gross receipts under Section 448(c) for any other purposes (such as determining eligibility for cash-basis method).
Download: Tax Guide For Businesses & Individuals
Bonus Update: Infrastructure Bill & The ERC
Also on Aug. 10, the Senate approved the trillion-dollar infrastructure bill, also known as H.R. 3684: the INVEST in America Act, which would end the ERC early and essentially eliminate the credit for Q4 of 2021 except in the case of a “recovery startup business.”
The ERC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and amended by the Consolidated Appropriations Act. The American Rescue Plan Act, enacted March 11, made the ERC available to eligible employers for wages paid during the third and fourth quarters of 2021. However, H.R. 3684 would repeal that extension for wages paid after Sept. 30, 2021.
Naturally, there are some additional hurdles that need to be cleared before this particular bill becomes law. We will continue monitoring the situation and will provide updates as they are available. The House of Representatives won’t return from recess until Sept. 20, so any new developments will likely occur after that date.
As you can see, there are a lot of changes occurring at any given moment. Our ERC task force continues to monitor the situation and make recommendations regarding the next steps. At this time, the best thing you can do is contact your Rea advisor if you have questions. Otherwise, know that Rea & Associates continues to follow the changes that are taking place and will do everything possible to help you comply with ever-changing guidance and legislation.
By Greg Speece, CPA, MT (Dublin CPA Firm)