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IRS Expands Guidance on Employee Retention Credit Extension

Posted on Apr. 5, 2021

The IRS has expanded on previous guidance on the employee retention credit, addressing changes Congress made to the credit at the end of 2020 that apply to the first two quarters of 2021.

Notice 2021-23, 2021-16 IRB 1, supplements last month’s Notice 2021-20, 2021-11 IRB 922, which provided much-anticipated guidance on application of the ERC to wages paid during the 2020 calendar year.

In amplifying the previous guidance, the new notice takes the extension of the credit into account in explaining expanded eligibility, a modified gross receipts test, revisions to qualified wages, limitations on the credit, and procedural aspects for claiming the ERC during the first two quarters of this year.

Modified Eligibility

The Consolidated Appropriations Act, 2021 (P.L. 116-260), amended the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) to provide that an eligible employer can claim the ERC for qualified wages paid in the first and second calendar quarters of 2021. Only employers carrying on a trade or business during the calendar quarter for which the credit is determined are eligible for the credit.

Notice 2021-23 explains which employers are eligible to claim the ERC under the changes made by the Consolidated Appropriations Act. It says that while governmental entities aren’t generally considered eligible for the ERC, colleges, universities, and governmental entities with the principal purpose or function of providing medical or hospital care are eligible in the first and second quarters of 2021 and will be treated as satisfying the trade or business requirements as long as they satisfy other eligibility requirements.

For 2021, each of the first two calendar quarters is treated separately when determining when an employer experiences a significant decline in gross receipts for purposes of the ERC, the notice explains. To qualify, the employer’s gross receipts must be less than 80 percent of the gross receipts it had for the same quarter in 2019.

The notice also provides alternative calculations for determining the decline in gross receipts for employers that were not in existence at the beginning of the relevant calendar quarter. Those determinations can be based on comparisons of gross receipts for specific preceding quarters with those of corresponding quarters in another year.

For example, the IRS notes that for the first calendar quarter of 2021, an employer could take its gross receipts for the fourth calendar quarter of 2020 and compare them with those from the fourth calendar quarter of 2019 to meet the gross receipts test. In any case, eligible employers must maintain documentation to support their determinations.

Qualified Wages

Notice 2021-23 clarifies application of the qualified wage rules for large eligible employers, defined under the Consolidated Appropriations Act as those with more than 500 full-time employees in 2019.

Under the previous notice, there were specific limitations on qualified wages depending on the amount that an employee would have been paid before the employer’s decline in gross receipts. Under the new notice, those limitations are removed for qualified wages paid during the first two quarters of 2021.

Similarly, Notice 2021-23 provides that restrictions contained in Notice 2021-20 regarding computation of the ERC when work opportunity credits were also claimed by an employer have been removed.

The notice also defines various terms, including “average quarterly wages,” that were not defined in the CARES Act, and it clarifies other procedural rule changes regarding large and small eligible employers. For example, in some circumstances, small employers can request advance payment of the ERC.

Finally, the notice makes clear that eligible employers can access the ERC for the first and second calendar quarters of 2021 before they file their employment tax returns. They should do so by reducing employment tax deposits in anticipation of the ERC.

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