IRS issues additional ERC guidance

On Aug. 4, 2021, the IRS released Notice 2021-49 (Notice), which amplifies both Notice 2021-20 and Notice 2021-23 by providing additional guidance on the employee retention credit (ERC), applicable to the third and fourth calendar quarters of 2021. Specifically, the Notice addresses changes made to the ERC by the American Rescue Plan Act of 2021 (ARPA). Additionally, the Notice includes guidance on several miscellaneous issues with respect to the credit for both 2020 and 2021.

Before addressing the guidance contained within the Notice, it’s important to note that the Senate, as a means of funding the bipartisan infrastructure bill (see our previous tax alert, Bipartisan infrastructure bill moves forward), has proposed ending the employee retention credit (ERC) program three months early (i.e., eliminating the credit for the fourth quarter of 2021). The House, however, is on recess until Sept. 20, 2021, creating a narrow window for Congress to eliminate the ERC for the fourth quarter of 2021 (without making the change retroactive).  The Notice provides that Treasury and the IRS will continue to monitor potential legislation related to the ERC that may impact certain rules it covers. We will continue to monitor updates and issue additional communications as new information becomes available.

Key takeaways

Wages paid to majority owners and their spouses\

The IRS gave much awaited clarification to employers eager for guidance on the ability to treat wages paid to majority owners (more than 50%) and their spouses as qualified. The guidance, however, is very taxpayer unfriendly as it, in effect, provides that majority owners and their spouses can only treat their wages as qualified to the extent they do not have any living related individuals (ancestors, lineal descendants, siblings and step-siblings, aunts and uncles, nieces and nephews, in-laws, or other individuals)