The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) provided a number of changes to the Employee Retention Tax Credit (ERTC). Most of these changes are only applicable starting Jan. 1, 2021 and (at the time) only applied to the first two quarters of 2021. Congress has since extended the ERTC from June 30, 2021 to Dec. 31, 2021.
We discussed many of the Relief Act changes in our article on the IRS’s initial guidance in Notice 2021-20. The IRS has now issued Notice 2021-23 with some additional guidance on the Relief Act changes that are effective in 2021.
- The Relief Act provisions allow governmental colleges or universities (such as state universities) to apply for the credit (if otherwise eligible) for 2021.
- The Notice provides that the IRS will use section 1.170A-9(c) for the definition of governmental college or university and use 1.170A-9(d) for determining a governmental entity providing medical or hospital care.
- A related rule provides that the wages used in determining the ERTC qualified wages for a governmental college or university or entity providing medical/hospital care includes most, but not all, wages paid to governmental employers that would otherwise be exempt from FICA/Medicare (for example, certain employees of state governments under sections 3121(b) (7)).
- The Relief Act provisions changed the ERTC gross receipts eligibility test from a “more than 50% decline in gross receipts” to a “more than 20% decline in gross receipts” for 2021.
- The Notice confirms that the gross receipts test for the first two quarters of 2021 is NOT under the special two-quarters rule allowable in 2020. Under the two-quarters rule, once a company had a more than 50% reduction in gross receipts for a quarter, the company was also treated as meeting the ERTC eligibility rule for the following quarter, even if the company’s gross receipts rebounded in that next quarter. With this change, in 2021 the company must satisfy the “more than 20% decline in gross receipts” on a quarter-by-quarter basis.
- The Notice also discusses the Relief Act provision allowing a company to elect to use a look-back rule (applying the gross receipts numbers from the previous quarter, rather than the current quarter, in showing a more than 20% decline in gross receipts). While not completely clear, it appears that the employer makes this election on a quarter-by-quarter basis.
- The Notice provides special rules for companies that were not in existence in 2019. Generally, the company can use the first or second quarter of 2020 (as applicable) to show the more than 20% decline in gross receipts.
- The Notice discusses the Relief Act change for 2021 that allows an employer using the section 51 Work Opportunity Credit for a given employee to nevertheless claim an employee retention credit based on wages paid to that employee (if otherwise eligible under the ERTC rules). However, the employer cannot use the same wages for both the Employee Retention Credit and the Work Opportunity credit.
- The Notice provides more guidance on the rules around advanced credits under the ERTC. Under the Relief Act, for 2021, only a ‘small employer’ can use Form 7200 to claim the ERTC.
- However, even a ‘small employer’ can only claim 70% of the ‘average quarterly wages’ paid in 2019. However, both a ‘large employer’ and a ‘small employer’ can reduce payroll tax deposits as a mechanism for obtaining the credit earlier than under the Form 941.
- The Notice provides guidance on how a small employer should determine the average quarterly wages, including guidance for seasonal employers. In general, the employer averages the wages from the four quarters in 2019 reported on Form 941 Line 5c (Medicare wages and tips). An employer not in existence in 2019 can generally use the average quarterly wages for 2020. Other detailed guidance is provided for other fact patterns.
- As a note, because the first quarter of 2021 is now complete and most payroll companies have closed, or will soon close, the Form 941 processing period, most companies will have to use the Form 941 X to claim the credit for the first quarter of 2021.