By Chris Keegan, CPA-Austin
The IRS recently provided Notice 2021-49 to address various outstanding issues and questions related to the employee retention credit (ERC). One item of note deals with the requirements related to income tax reporting of credits claimed for 2020 wages paid.
Timing of Qualified Wages Deduction Disallowance
Any credit claimed through the ERC program will result in a reduction of wage expense claimed to the extent of the credit amount (Section 280C). This treatment is common with wage-based credits. Due to timing issues of eligibility for the 2020 ERC and release of related IRS guidance, many taxpayers did not claim the ERC on their 2020 wages until 2021, if they have yet at all. Many 2020 returns have already been filed and other taxpayers and preparers have been waiting to file their 2020 taxes pending guidance on 2020 ERC reporting.
The IRS has taken the position that any 2020 credit claimed based on 2020 wages paid must be reported as a reduction of the deduction allowed for qualified wages in the year the wages were paid. If taxpayers are claiming the ERC on their 2020 wages through the filing of amended 2020 Forms 941, those credits must be reflected on their 2020 income tax returns. If 2020 returns have already been filed, amended returns or administrative adjustment requests, if applicable, will need to be filed to reflect the credit being claimed. This has the potential to lead not just to the need for amended business returns, but also amended returns for Schedule K1 recipients.
Eligible Shareholder Wages
Notice 2021-49 also addresses the issue of eligible wages for a greater than 50% shareholder, including issues related to attributed ownership. Based on the guidance in this notice, wages paid to a more-than 50% owner are not eligible for the ERC if the owner has any living relative regardless of them being employed by the business. This includes a child, sibling, parent, grandparent, grandchildren, aunt, uncle, niece, nephew and/or in-law. This guidance has made it exceedingly difficult for an owner’s wages to be qualified for the ERC. TXCPA’s Federal Tax Policy Committee is monitoring IRS correspondence for any additional guidance that might grant relief to these rules.
IRS Notice 2021-49 also includes guidance on various other ERC issues, including:
- Definition of “full-time equivalents” for purposes of the ERC,
- Guidance on determining gross receipts drop,
- Recovery startup business claims for the ERC, and
- Treatment of tips and application of tip credit.
Potential Legislation Could Eliminate Q4 Benefit
H.R. 3684, the Infrastructure Investment and Jobs Act, contains a “pay-for” provision that would terminate the ERC at the end of Q3 2021 (except for recovery startup businesses) instead of letting it run through Q4. The House is set to consider the infrastructure bill on Sept. 27, so the fate of the last quarter remains uncertain. Stay tuned.