The IRS has just released new guidance that affects the calculation of the Employee Retention Credit (ERC). The most important changes / clarifications are:
- Majority Owners. Previously, kids, grandparents, brothers, sisters, etc. of a 51% or more owner were not eligible for ERC, but the law was silent on the owners and their spouses. This latest guidance clarifies that they are no longer eligible, which is a significant change to how the industry has been applying the ERC credit rules. While many are speculating this could be reversed, it would take an act of Congress to do so (which means it is unlikely this will be resolved quickly). For those applications already filed, you may have an obligation to file an amended 941 to correct the error. For those who have not yet filed, you should not include owner or spousal wages in the calculation of the ERC. That said, given that this could change, you may still want to review your strategy when paying owners to ensure you have paid yourself (or your spouse) everything that is allowable based on their job; this will ensure you receive the maximum credit if reinstated.
- Tax Returns. The tax code has always been such that if you claim the ERC for tax year 2020, you were supposed to file an amended 2020 income tax return to report the income in that year (which also may require you to file amended personal returns as well). While it was hoped that the IRS would fix this so that you didn’t have to report the credit as income until the year it was received, this latest guidance they confirmed that you do indeed need to do this. While it's important to be aware of the requirement, it is recommend that you hold off on any action for a little while to see if Congress intervenes. Many of you have not even received credits that were applied for months ago. In the meantime, just be aware that this may be coming.
Also, an important reminder: Regardless of timing, ERC is still taxable income (unlike PPP which ended up being tax free). It may be advantageous to update your tax plan or projection, especially if you carried the credit forward as opposed to requesting a check.
As always, if you have questions or would like to review your strategy—especially given there are more intricacies of the ERC than are reflected above—please reach out to your RDG+Partners tax professional, or call 585-673-2600.