Once-in-a-Lifetime Tax Incentive: Employee Retention Credit extended to Q3 and Q4 2021, and expanded for start-ups and struggling businesses.
On August 4, 2021, the IRS released additional guidance concerning the Employee Retention Credit (ERC) for Q3 and Q4 2021. See IRS Notice 2021-49. A notable expansion to eligible businesses includes any business started after February 15, 2020. Further, any employer experiencing a significant decline in quarterly gross receipts for Q1 to Q3 2021 will automatically qualify for the ERC for at least two quarters.
Most of the rules regarding the ERC, as summarized in our previous post, remain unchanged. Eligible employers whose operations were partially suspended by government orders or who experienced a significant decline in gross receipts are eligible for a maximum of $5,000 credit per employee for 2020, and $7,000 per quarter, per employee for 2021. Every employer should explore whether they qualify for this unprecedented incentive intended to help businesses recover from the pandemic. The most significant items addressed in the newly issued IRS guidance are described below:
Expansions to Eligible Businesses
- Recovery Startup Businesses – A recovery startup business is one that began business after February 15, 2020 whose average annual revenue is less than $1,000,000 and does not otherwise qualify for the ERC for a partial suspension or significant decline of receipts. Such businesses can claim up to $50,000 in credits in each Q3 and Q4 2021 for a potential $100,000 credit for the year.
- Severely Distressed Businesses – An employer whose gross receipts are less than 10% of receipts compared to the same quarter in 2019 may treat all wages paid to employees as qualified wages, even if it was a “large employer” for ERC purposes in 2020 or the first two quarters of 2021.
- Alternative quarter “lookback” election – This election allows employers with a 20% decline in gross receipts for any quarter in 2021 eligible to claim the ERC in the next quarter as well. In other words, if an employer qualifies for the ERC in 2021, it will automatically qualify for the credit for at least two quarters.
- Deductibility of qualified wages – Employers who receive an ERC must reduce their federal income tax deduction for qualified wages by the amount of credit received. This may mean require amended returns for employers who received a credit for qualified wages in 2020, but deducted the full amount of wages paid.
- Inclusion of tips in qualified wages – If an employee receives at least $20 in cash tips for that month, all cash tips for that month are included in qualified wages for ERC purposes.
- Full-time equivalent calculation not necessary – Employers are not required to include “FTEs” when determining average number of full-time employees for purposes of ERC eligibility.
- Gross Receipts Safe Harbor – Employers may exclude the following gross receipts for purposes of determining whether they had a significant decline in gross receipts: PPP loan forgiveness, shuttered venue operator grants, and restaurant revitalization grants. These exclusions must apply consistently across all quarters for which the ERC is claimed in order for the safe harbor to apply. See Rev. Proc. 2021-33.
Buckingham’s team of Tax attorneys are standing by to assist employers in taking advantage of this unique and limited tax credit opportunity. If you need help determining whether this opportunity is available for your business or have questions about the process, please do not hesitate to contact us.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.
Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423
Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.