As many of the Small Business Administration (SBA) COVID-19 relief programs have ended, there has been concern about how Denver businesses will access the resources needed to navigate the recovery. The closure of the Paycheck Protection Program, Shuttered Venue Operators Grant Program, and the Restaurant Revitalization Fund, has left few options to consider. The good news is the Employee Retention Tax Credit (ERC) is still available through the end of 2021. In fact, the IRS recently issued updated guidance which not only makes it easier for certain companies to qualify but also provides guidance on persistent questions and concerns. IRS Notice 2021-49 outlines several important changes and updates to the ERC. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
2021 ERTC Changes
Maximum Credit Value
The maximum value of the ERC was originally for the first two quarters of 2021 at $7,000 per employee, per quarter. This meant for the first half of the year an employer could receive a maximum credit amount of $14,000 per employee. Recent guidance confirms the credit amount will remain the same for the balance of the year. This means that an employer will now be able to claim a maximum credit of $28,000 per employee for 2021.
Recovery Start-Up Businesses
New for the second half of 2021 is the classification of a recovery start-up business. These are businesses that started after February 15, 2020, or 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 3rd and 4th quarters of 2021 is set at $50,000. 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 for 2021, a large employer is defined as a company that has more than 500 employees. This is an important distinction because only small employers (less than 500 employees) can include in qualified wages amounts paid to employees regardless of whether services were rendered. Large employers can only include wages paid to employees providing services. However, there is an exception for Severely Financially Distressed Employers. 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.
There were also important clarifications made in the recent guidance, including:
- Full-Time Equivalents– The IRS has received several questions around how a full-time employee is defined for purposes of calculating the ERC. Full-time equivalents are not used when making small v. large employer determination. Full-time employees are used for this determination. In addition, there has been concern about whether wages paid to non-full-time employees can be treated as qualified wages assuming all other criteria have been met. In recent guidance, the IRS provided answers to both questions. An employee’s full- or part-time status is not relevant when determining qualified wages assuming all other requirements to treat the wages as qualified have been satisfied.
- Alternative Quarter Elections – Some have expressed concern that once the Alternative Quarter Election method is used to determine qualification, the business will be required to continue using the election method for the future period. Since eligibility based on a decline in gross receipts is made quarterly, a business is not required to use this method on an ongoing basis.
- 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).
- Gross Receipts Safe Harbor – The safe harbor was designed to allow an employer which acquires a business in 2020 to include the gross receipts of the acquired business in its gross receipts for 2019 to determine whether a significant decline in gross receipts has occurred. The inclusion is permitted despite the fact the employer did not own the acquired business in any 2019 calendar quarter. While the safe harbor was effective for 2020, many have been asking if the same rules will apply when calculating the 2021 credit. The good news is the rule will continue to apply.
- Gross Receipts Calculation – There have also been questions about how to calculate the gross receipts of employers that came into existence in the middle of a 2020 calendar quarter. Employers are required to follow the rules outlined in IRS Notice 2021-20 for 2021. More specifically, an employer that came into existence in the third quarter of 2020 should that quarter as the base period to determine whether a significant decline in gross receipts occurred for the first three quarters of 2021. The actual 4th quarter data should be used when making the determination for the 4th quarter of 2021.
- Owners and related individuals – Owner, Shareholder & Partner compensation is complex and may not be eligible to be included as qualified wages when calculating the credit. Payment to other related individuals including spouses, siblings, children, parents, aunts and uncles, grandparents, grandchildren, and stepparents may not be eligible to be included as qualified wages as well.
- PPP Forgiveness – The ERC adds substantial complexity and opportunities for tax planning and decreased income tax. For example, qualified wages for which an employer claims the ERC may not also be claimed as payroll costs when seeking Paycheck Protection Program (PPP) loan forgiveness. These rules make it imperative to proactively assess the situation to determine the most tax-efficient manner to leverage multiple program benefits.
- Documentation – Unlike PPP forgiveness, the documentation which must be submitted and retained is much more significant. This includes documentation demonstrating how the employer determined the number of qualified wages, amount of allocable health plan expenses, copies of any completed Form 7200, and federal employment tax returns submitted to the IRS.
While many of the federal COVID-19 relief programs have expired, it does not mean the saving opportunities have dried up. The savings potential available under recently changed rules presents an opportunity that Denver business cannot afford to miss. If you have questions about the Employee Retention Credit or need assistance with eligibility or calculations, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.