In recent months, the Payroll Protection Program (PPP), Restaurant Revitalization Fund (RRF) and Shuttered Venue Operators Grant (SVOG) have closed. These COVID-19 relief programs have provided billions of dollars in financial assistance to companies across Texas. It appears that Congress does not have plans to allocate additional funding to these programs. In fact, the recently passed Infrastructure Bill does not contain any funding provisions. This comes at a time when the delta variant is increasing uncertainty amongst many employers. The good news is that businesses can still claim the Employee Retention Tax Credit. In fact, the IRS recently issued Notice 2021-49 that not only outlines several updates effective July 1st but also clarifies other important points. This includes issues related to the treatment of tips, the Alternative Quarter Election, and the new Gross Receipts Safe Harbor. The update is welcome news for those considering credit applications. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of the key details below.
Updates to the Employee Retention Tax Credit
Full-Time Equivalents (FTEs)
There has been confusion about whether FTEs should be included in determining whether a company is a large or small employer. In addition, there have also been questions about whether wages paid to part-time employees may be treated as qualified wages. In response, the new regulations confirm that FTEs do not need to be included when calculating full-time employees in the determination of employer size (small vs. large). In addition, there should be no distinction made between full-time and part-time employees when determining qualified wages (assuming all other criteria are met).
Treatment of Tips
Businesses where employees customarily receive tips have been unsure whether they should be counted as qualified wages. Only cash tips received during a calendar month that exceeds $20 or more should be counted as qualified wages. In addition, it was also confirmed an employer could claim both the ERC and the Section 45B credit.
Alternative Quarter Election
For 2021, a business may elect to use an alternative quarter when attempting to satisfy the requirement for a decline in gross receipts. Under the election, an employer may use the immediately prior calendar quarter when making the comparison. However, there was concern that once this election was made it would be required for the balance of the year. Since credit eligibility is determined on a quarter-by-quarter basis, there is no requirement to continue using the election.
Excluded Owner Compensation
There was also clarification on whether wages paid to owners could be included in the calculation of the qualified wage. The wages paid to any owner that, directly or indirectly, owns more than 50% in the value of the outstanding corporate stock should not be included as part of qualified wages.
Gross Receipts Safe Harbor
A new safe harbor program permits employers that acquired a business during 2020 to include the acquired company’s numbers in its gross receipts for 2019. The safe harbor allows the inclusion to be made despite the fact the employer did not own it during that time. In addition, the guidance also confirms the same rules will apply for those that acquire a new business in 2021.
Gross Receipts Calculation
The guidance also provides direction on how to calculate the gross receipts of an employer that started business in the middle of a 2020 calendar quarter for 2021. Essentially, the same rules which were in place for 2020 apply to 2021. For example, an employer who started business in the third quarter of 2020 should use that quarter as the base period against which the determination of a significant decline should be measured for the first three quarters of 2021. The last quarter of 2020 should be used as a comparison timeframe for the last quarter of 2021.
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