TAXFAX Fall 2021

Published November 15, 2021 By George W. Benson, Counsel, McDermott Will & Emery LLP; and Tara Guler, Senior Manager, Baker Tilly Virchow Krause, LLP

Originally published in The Cooperative Accountant, Fall 2021 Issue

Employee Retention Credit

The CARES (“Coronavirus Aid, Relief, and Economic Security”) Act enacted in March of 2020 provided various benefits for employers to retain their current employees amid the economic downturn of the pandemic.  The Employee Retention Credit (“ERC”) was first introduced in this Act.  In December of 2020, the ERC was modified under the Consolidated Appropriations Act (“CAA”), which made significant taxpayer friendly changes.  Specifically, the CAA provided retroactive changes to the ERC (allowing Payroll Protection Program (“PPP”) recipients to also claim the ERC) and extended the ERC into the first two quarters of 2021.  Not long after, Congress extended and expanded the ERC a second time with the passage of the American Rescue Plan Act (“ARPA”), extending the ERC through December 31, 2021.  Outside of the legislative language, guidance on the ERC can be found in IRS Notices 2021-20, 2021-23 and 2021-24.

The ERC is a refundable payroll tax credit claimed on Form 941 and is calculated as a percentage of qualified wages.  In order to be eligible for the ERC, an employer must have been subject to a full or partial closure due to a government order or experienced a significant decline in gross receipts.  Exactly what can be treated as qualified wages hinges on whether the employer is a large or a small employer.  Determination of eligibility and qualified wages can appear to be a simple on its face, but the rules are often vague, complex, and heavily facts and circumstances based, requiring employers to dig into the details to determine if they are truly entitled to a credit.

Aggregated group

The existence of an aggregated group can have a considerable impact on an employer’s entitlement to the ERC.  As such, before testing the employer’s eligibility and size, the employer must first determine if they are part of an aggregated group.  For purposes of the ERC, employers are generally aggregated under the controlled group and affiliated service group rules (different tests may apply to tax-exempt entities).  These rules can be quite complex, and it is strongly encouraged employers consult their tax advisors.  As an overview, the rules typically break out as follows:

  • Controlled Group
    • Parent-subsidiary with more than 50% ownership, vote or value
    • Brother-sister with five or fewer common owners which have both:
      • Controlling interest (80% or more, vote or value), and
      • Effective control (more than 50%, vote or value)
    • Affiliated service group
      • A-Type Group
      • B-Type Group
      • Management Group

Full or partial government shutdown

A business is considered to be fully or partially suspended if, due to COVID-19, the government fully or partially suspended business operations (this can include a reduction to business hours or even modifications to operations as required by local social distancing mandates).  For those employers eligible under this provision, the credit is calculated only on wages during the suspension period, not the entire quarter of the suspension.

Significant decline in gross receipts

For the 2020 calendar year, a significant decline in gross receipts is a greater than 50% decline compared to the same quarter in 2019.  For 2021, a business must see a decline of greater than 20% in gross receipts when comparing corresponding quarters in 2021 and 2019.  Employers should be aware that the mechanics for testing a significant decline in gross receipts in 2021 is different than 2020.  Additionally, employers need to ensure they have taken into account all revenue sources (e.g., forgiven PPP loans, grants, etc.).

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