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IRS Provides ERC Guidance for Start-Ups, Distressed Employers

Posted on Aug. 5, 2021

The IRS and Treasury have responded to some remaining uncertainties for employers — including “recovery start-ups” — that want to claim the employee retention credit provided in the coronavirus pandemic response laws.

Notice 2021-49, 2021-34 IRB 1, released August 4, provides more guidance on the changes made in the American Rescue Plan Act of 2021 (P.L. 117-2) to the ERC for the third and fourth calendar quarters of 2021.

The notice addresses ARPA’s expansion of the credit for July through December 2021, the inclusion of recovery start-up businesses as eligible employers, the modification of the qualified wages definition for “severely financially distressed employers,” and specific disallowances from qualified wages for the credit.

The guidance provides that in the third and fourth calendar quarters of 2021, a recovery start-up business that is a small eligible employer under section 3134 may treat all wages paid to an employee during the quarter as qualified wages. The determination of whether an employer is a recovery start-up business is made separately for each quarter.

The notice states that a severely financially distressed employer is an eligible employer with gross receipts that amount to less than 10 percent of its gross receipts for the same calendar quarter in calendar year 2019 — or 2020, if the employer didn't exist in 2019. A severely financially distressed employer that is a large eligible employer may treat as qualified wages all wages paid to its employees during the quarter in which the employer is considered severely financially distressed.

Limits on qualified wages will continue to apply in the third and fourth quarters; however, a separate credit limit applies to recovery start-up businesses, the notice says.

Notice 2021-49 follows Notice 2021-20, 2021-11 IRB 922, which provided ERC guidance on qualified wages paid after March 12, 2020, and before January 1, 2021, and Notice 2021-23, 2021-16 IRB, which provided guidance regarding the first two calendar quarters of 2021.

The ERC was originally enacted in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and applied through the end of 2020, and the credits were extended through the first and second quarters of 2021 in the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Notice 2021-49 provides answers to questions that the IRS and Treasury have received on ERC issues regarding employee definitions, treatment of tips as qualified wages, majority owner wages treatment, and the timing of the qualified wages deduction disallowance.

The notice states that Treasury and the IRS are monitoring pending legislation and could issue more guidance if needed.

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