In response to uncertainty about the implementation of the employee retention tax credit ( the “ERTC”) following a variety of revisions to the ERTC since its creation under the Coronavirus Aid, Relief, and Economic Security Act, the Internal Revenue Service (“IRS”) issued Notice 2021-20 providing guidance regarding the ERTC. Importantly, despite the fact that the ERTC, as modified by the Taxpayer Certainty and Disaster Tax Relief Act (the “Relief Act”), applies to wages paid after March 12, 2020, and before January 1, 2021, as well as wages paid on or after January 1, 2021, Notice 2021-20 applies only to ERTCs applicable to wages paid after March 12, 2020, and before January 1, 2021. The IRS indicates that it will provide separate guidance for ERTCs applicable to wages paid after January 1, 2021.
The ERTC enacted under the CARES Act provided a tax credit equal to 50% of the “qualified wages” paid to an employee up to $10,000 per calendar quarter. Under the CARES Act, businesses were only eligible for the ERTC if they were an “eligible employer,” meaning that such business either (i) was required by a governmental authority to fully or partially suspend its trade or business because of COVID-19 or (ii) experienced a significant decline in gross receipts, which was defined as decline of greater than 50% in any 2020 calendar quarter as compared to the same calendar quarter in 2019.
In the months following the creation of the ERTC under the CARES Act, the IRS published and regularly updated guidance related to the ERTC in the form of FAQs published on the IRS website. However, those FAQs have not yet been updated to reflect the most recent changes to the ERTC and the FAQs were not binding.
As we have previously discussed, the Relief Act amended the ERTC. Specifically, the Relief Act modified the ERTC in the following four key ways:
Due to the several changes to the operation of the ERTC contained in various pieces of legislations, IRS FAQs, and other IRS publications, the IRS issued the Notice 2021-20 to synthesize and consolidate into one location the current rules related to the operation of the ERTC.
Rather than providing new legal authority, Notice 2021-20, which is binding on the IRS unlike the FAQs, summarizes existing legal authority and provides guidance in a question and answer format on the operation of the ERTC as it relates to wages paid after March 12, 2020, and before January 2, 2021. The following guidance provided in Notice 2021-20 differs from existing IRS FAQs:
In addition to the specific issues discussed above, the Notice includes a total of 71 questions and answers related to a variety of ERTC issues.
Thompson Coburn continues to monitor these important developments in the CARES Act and other Federal relief efforts.
Edward Buchholz is a member of Thompson Coburn LLP’s Tax Group. David J. Kaufman is a member of Thompson Coburn’s LLP’s Corporate & Securities practice group.
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