The Employee Retention Credit (ERC) under IRC Sec. 3134 was enacted by Section 9651 of the American Rescue Plan Act of 2021 (ARPA), Internal Revenue Service (IRS) Notices 2021-23 and 2021-49 provides further guidance and clarification of the rules under this relief program for businesses claiming the credit in the remainder of 2021. Understanding the impact of these changes and the opportunities available is crucial for any organization.
Extension of ERC Credit
Notice 2021-23 provided extensions of the ERC credit for qualified wages paid by an eligible employer after December 31, 2020 to the first and second quarters of 2021. Notice 2021-49 extended benefits to the third and fourth quarters of 2021. Eligible employers can continue to qualify for a quarterly maximum benefit of $7,000, limited to $10,000 of qualified wages inclusive of “allocable qualified health expenses,” as defined.
Keep in mind that ERC credits claimed under “recovery startup businesses” are subject to separate credit limitations under section 3134(b)(1)(B). These rules may apply to businesses with operations after February 15, 2020, for which average annual gross receipts do not exceed $1,000,000 and do not qualify under the decline in gross receipts or full and partial shutdown rules.
Small employers are companies with average full-time employees not exceeding 500, based on average employees during 2019. Notice 2021-49 further clarified that for companies not in existence in 2019, the average employees can be calculated using 2020 employee data. Large employers exceeding 500 employees can only claim credits for qualified wages paid to employees not to work and that meet other eligibility tests (decline of receipts or fully/partial shutdown). Employers need to determine qualifications each quarter to determine proper eligibility.
Large employers can also qualify for benefits if the employer is considered a “severely financially distressed employer,” where a 90% decline in gross receipts exists during any quarter in 2021 compared to 2019.
Interaction of ERC with Other Relief Programs
Eligible employers may qualify for ERC in conjunction with other relief programs including the Paycheck Protection Program (PPP), grants in connection with the Consolidated Appropriations Act of 2021 and ARPA. However, qualified wages utilized to receive credits under ERC cannot be claimed as payroll costs for purposes of forgiveness of PPP loans or to support the use of funds for shuttered venue operator grants and restaurant revitalization grants. It is crucial for businesses to understand the requirements under each program to properly maximize benefits.
Business owners need to maintain proper documentation under each program to support eligibility and the separation of qualified wages utilized. The limitation for assessment or collection of incorrect benefits received from ERC has also been extended to five years from the date of the return filed under section 6501(b)(2).
Gross Receipts Safe Harbor
The forgiveness of a PPP loan and grants received under other programs are not included in gross income. However, they are considered part of “gross receipts” which is used to calculate the decline of gross receipts test. Employers can apply this safe harbor rule, that allows exclusion of these funds from the gross receipt test, for purposes of qualifying for ERC. The employer is not required to apply safe harbor but, if used in all relevant quarters claiming the credit, must do so. The eligible employer also needs to consider aggregation rules for employers treated as a single employer.
An eligible employer may revoke the use of safe harbor and make an election for any period. The revocation needs to be done consistently for all relevant periods and documentation needs to be maintained to support eligibility.
- Alternative quarter election for the third and fourth quarters in 2021 has been extended. Qualified employers can elect to use this method for any quarter in 2021. Employers are not required to use the alternative quarter election each quarter.
- Employers who acquired a business in 2020, must include the gross receipts of the acquired business in2019 to determine eligibility for the decline in gross receipts test. This rule will continue to apply for employers that acquire a business in 2021.
- Constructive ownership needs to be analyzed to determine the majority owner, whose wages are not qualified to receive ERC credits. An exception to the rule exists for a majority owner without lineal descendants, as defined by section 267(c)(4).
Please contact your Mazars professional for additional information.