In recent days the Treasury Department has issued some much-anticipated guidance on certain issues surrounding this potentially valuable credit.
Some general highlights:
- Wages paid to majority owners and their relatives, as defined, are not considered qualified wages for purposes of obtaining the credit. In general, wages paid to unrelated, minority owners, will be eligible for the credit.
- Timing of Qualified Wages Deduction Disallowance
- The general rule is that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. Under Notice 2021-20, a reduction in the amount of the deduction caused by receipt of the ERC occurs in the tax year in which the qualified wages were paid or incurred. In many cases, tax returns have already been filed with deductions for wages and qualified expenses that have or will subsequently be used to claim ERC. When a taxpayer receives the employee retention credit, the taxpayer should file an amended federal income tax return for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return.
- This is a major difference from the Payroll Protection Program which allowed qualifying PPP expenses to be deducted on federal tax returns.
- In simple terms, if you are claiming ERC for periods that are part of an already filed income tax return, you will need to file amended income tax returns. And, in the case of pass-through entities (S-Corps and Partnerships), both the pass-through entity and the shareholders/members will be required to file amended returns.
- Third and Fourth Quarters of 2021
- IRS Notice 2021-49 provides guidance for “eligible employers” to claim the ERC, if qualifications are met in the third and fourth quarters of 2021.
- However, in the infrastructure bill recently advanced by the Senate, the option for employers to claim ERC in the 4th quarter of 2021 has been eliminated. There is uncertainty regarding what will happen to the bill in the House, and what will emerge from any potential conference committee.
These are high-level summaries of certain areas surrounding the ERC. Please reach out to us with any questions regarding specific circumstances pertaining to the credit.