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Employee Retention Tax Credit Eligibility: The Evolving History and Requirements for Access to Relief

The IRS issued highly anticipated guidance on the ever-evolving Employee Retention Credit (ERC) last Wednesday, August 4, 2021, this time relating particularly to the ERC’s extension through the end of 2021. Some highlights of that guidance include:

  • A confirmation of previous guidance that borrowers may not use the same wages to request Paycheck Protection Program Loan forgiveness and the ERC;
  • Businesses are prohibited from making an ERC claim for payroll costs covered by a shuttered venues operators grant or restaurant revitalization fund grant from the Small Business Administration;
  • If an employer amends their 2020 Form 941 to claim an ERC for 2020, it is required to amend its 2020 tax return to include such reduction of expense;
  • Wages paid to majority owners/those owners’ spouses are not qualified wages.

By way of background, in what is now relatively common knowledge, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. And, as part of that legislation, the Government instituted the ERC, a refundable tax credit against certain employment taxes. The ERC allows eligible employers immediate access to the credit by reducing employment tax deposits, or, in some cases, obtaining an advance payment from the IRS for the credit.

Congress' enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 as part of the Consolidated Appropriations Act (“CAA”) on December 27, 2020 made several notable changes to the ERC program. Importantly, eligible employers can now claim a credit of up to $7,000 per quarter on the qualified wages paid to employees if the employers either (a) experienced at least a 20% decline in gross revenue as compared to the same quarter in 2019, or (b) suffered a total or partial shutdown in 2021 due to governmental order(s) imposing COVID based limitations on commerce. Additionally, the CAA extended ERC relief through the first two quarters of 2021. More recently, the American Rescue Plan Act, passed on March 11, 2021, extended the ERC through the remainder of 2021.

Further, under the most recent iteration of the law, the definition of qualified wages was changed to provide:

  • For an employer that averaged more than 500 full-time employees in 2019 (a “Large Employer”), qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts; and
  • For an employer that averaged 500 or fewer full-time employees in 2019 (a “Small Employer”), qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

Thus, many companies that had exceeded the 100 employee threshold under a previous version of the law, may now take advantage of the full benefits provided by the ERC for 2021. Also, while the ERC program, like other stimulus programs promulgated under the CARES ACT, was designed to provide funds to companies struggling to maintain their workforce in the face of COVID-19, the relevant statutes and limited IRS guidance appear to extend the program to companies that have expanded their business, even significantly, since 2019. For example, the letter of the law articulates that a Small Employer in 2019 that, whether through acquisitions, mergers, or natural growth, thereafter exceeded 500 full time employees, may still claim the ERC in 2021.

Stated alternatively, based on both a close reading of the statutes and the notices published by the IRS, a reasonable argument can be made that the only salient number when determining "Small" or "Large" Employer status is what the average employee count was in 2019. So, it appears a company that grew from a Small Employer in 2019 to a Large Employer by 2021 is still eligible to claim employee retention credits for this year. It must be noted, though, that all entities eligible to claim the ERC still must limit their claim based upon the qualified wages they paid in 2021, as set forth above.

Calculating qualified wages based upon a decline in gross revenues for entities that have recently grown necessarily requires guidance, which the IRS issued by way of its Notice 2021-20. The Notice provides that such an entity can calculate its decrease in revenue by utilizing the 2019 revenue generated by the acquired business, even though the acquired business was not acquired until after 2019:

Question 28: How does an employer that acquires a trade or business during the 2020 calendar year determine if the employer experienced a significant decline in gross receipts?

Answer 28: For purposes of the employee retention credit, to determine whether an employer experiences a significant decline in gross receipts, an employer that acquires (in an asset purchase, stock purchase, or any other form of acquisition) a trade or business during 2020 (an acquired business) is required to include the gross receipts from the acquired business in its gross receipts computation for each calendar quarter that it owns and operates the acquired business. Solely for purposes of the employee retention credit, when an employer compares its gross receipts for a 2020 calendar quarter when it owns an acquired business to its gross receipts for the same calendar quarter in 2019, the employer may, to the extent the information is available, include the gross receipts of the acquired business in its gross receipts for the 2019 calendar quarter. Under this safe harbor approach, the employer may include these gross receipts regardless of the fact that the employer did not own the acquired business during that 2019 calendar quarter.

Notably absent in the Notice is any discussion of whether the guidance would differ if the employer transitioned from being considered a Small Employer to a Large Employer because of the acquisition.

Additionally, although the IRS has proffered guidance on ERC eligibility and the definition of qualified wages in the event of a decline in gross revenues, no guidance exists for entities claiming eligibility based upon a government imposed COVID related shut down where a company made the transition from small to large employer after 2019. In either case, it important for entities who seek relief via the ERC to navigate their participation in the program thoughtfully and with the assistance of competent counsel to ensure and document compliance and to assist in the event of a future governmental audit or inquiry.

Robert Guttmann assists business owners and executives develop and implement cost-effective solutions to current and potential legal issues. Additionally, as a litigator, Robert frequently represents both Debtors and Creditors in Bankruptcy and in State Courts. He also has extensive experience helping clients achieve optimal results in their interactions with Federal and State authorities. For questions regarding this article, please contact Rob at rguttmann@zeklaw.com

Attorney Robert Guttmann

J. David Morrissy is recognized throughout the country for his skillful navigation of complex commercial transactions, powerful litigation strategies, and insightful management of regulatory compliance matters. Mr. Morrissy has earned a reputation as a trusted counselor and legal and business resource for corporations and their principals, including nursing home owners and operators. For questions regarding this article, please contact David at dmorrissy@zeklaw.com

Attorney J. David Morrissy