New Employee Retention Credit Guidance
IRS issued further guidance on the employee retention credit (ERC) program via Notice 2021-49. The new notice addresses changes made by the American Rescue Plan Act of 2021 (ARP) to the ERC that are applicable to the third and fourth quarters of 2021. Those changes include, among other things, expanding the definition of eligible employer to include “recovery startup businesses”.
According to the previous guidance, employers are eligible to claim the ERC for a quarter during 2020 or 2021 if their business operations were fully or partially suspended due to a government order relating to COVID-19 or they experienced a decline in gross receipts. Under the new guidance, employers that qualify as a recovery startup business during the third and fourth quarters of 2021 are also eligible to claim the ERC for such quarters.
Employers qualify as a recovery startup business by meeting all three of the following:
- An employer is not otherwise eligible employer via the business suspension test or gross receipt test.
- An employer began carrying on a trade or business after February 15, 2020.
- Average annual gross receipts do not exceed $1 million for the three tax years preceding the quarter in which it claims the ERC.
The basic ERC amount for all eligible employers during 2021 is calculated as 70% of up to $10,000 of an employee’s qualified wages per eligible quarter. Additionally, employers eligible as a recovery startup business are also subject to an overall credit limitation of $50,000 per quarter (after application of the $10,000 wage limit). Eligibility as a recovery startup business is made separately for each quarter.
If an employer started business in 2020 and did not meet the conditions of the previous ERC guidance, it would be an opportunity to be qualified as a recovery startup business to receive ERC benefits.
The new notice also provides guidance on several miscellaneous issues applicable to all ERC calculations for 2020 and 2021. Refer to Notice 2021-49 for more details.