New ERTC Guidance Issued as Legislators Consider Ending the Credit Early

When the Employee Retention Tax Credit (ERTC) was first signed into law in March 2020, there were numerous outlying questions.  Some of these questions have been answered in recent months, but some are still being legislated.

They say the only constant is change, and that’s true in this case, too.  This month, the IRS issued additional guidance that helped fill in a few holes.  The guidance is for employers who paid qualified wages after June 30, 2021, but before January 1, 2022, and addresses issues surrounding the credit in both 2020 and 2021.  Let’s dive in.

Changes to the Third and Fourth Quarters of 2021

The rules governing the credit for the third and fourth quarters of 2021 are very close to the first and second quarters.  However, there are a few exceptions.

A third category of eligible employers, known as recovery startup businesses, are eligible for the ERTC.  This is in addition to businesses with partially or fully suspended operations because of COVID-19 and those which experienced a significant decrease in gross receipts.

  • What is a recovery startup business? An employer which started operating after February 15, 2020, has $1 million or less in annual gross receipts, and is not an otherwise eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
  • What are the rules, and what’s the limit? ERTC calculations for recovery startup businesses must follow the same rules as other businesses. $50,000 per quarter for all employees is the maximum credit amount for recovery startup businesses.

The credit is not available for qualified wages paid after June 30, 2021 that are connected to a shuttered venue operator grant (SVOG) or restaurant revitalization fund (RRF) grant.

You can treat wages paid to employees as qualified wages if you experienced a 90% or higher reduction in gross receipts compared to the same quarter of 2019.  This applies to businesses with more than 500 employees in 2019 that had fully or partially suspended operations because of COVID-19 or those which experienced a significant decrease in gross receipts.

Claiming the ERTC for 2020 and 2021

With the changes to the third and fourth quarters of 2021 also came guidance that applies to claiming the credit in 2020 and 2021.  This includes:

  • Qualified wage disallowance for credits filed in 2020 must be included on your 2020 tax return. You should file an amended federal income tax return if you filed an adjusted employment tax return (Form 941-X) to claim the credit and filed your 2020 federal income tax return prior to completing an ERTC study.  Amending will correct any overstated deduction.
  • When calculating your average number of full-time employees, you aren’t required to include full-time equivalents.
  • Businesses that acquired other businesses in 2021 can include the gross receipts of the acquired business when determining whether there was a significant decrease in gross receipts.
  • A safe harbor was introduced that allows you to exclude certain items, like PPP loan forgiveness and certain business and restaurant revitalization grants, when calculating gross receipts.
  • In certain circumstances, cash tips may be treated as qualified wages.

This guidance was issued shortly before the Senate passed a bipartisan infrastructure package that is now being debated in the House.  If passed, the legislation would end the credit on October 1 instead of December 31, 2021.  This information is accurate as of the publish date noted above.  We’ll keep you updated as this legislative package works through the process.  Contact your Adams Brown advisor to learn more about the Employee Retention Tax Credit.