Guidance from the IRS with Randy Crabtree
Randy returns in episode 50 of The Unique CPA to discuss new guidance from the IRS on the Employee Retention Credit. He talks about IRS Rev Proc 2021-33 (PPP loans, Restaurant Revitalization, Shuttered Venues, cash or accrual accounting) and IRS Notice 2021-49 (more on Shuttered Venues and Restaurant Revitalization), in addition to wage and employee counting methods that may apply to restaurants or all businesses generally, large and small.
Today, we’re going to continue our series on the Employee Retention Credit. I think this is the third in a series we’re doing on the Employee Retention Credit and very well may be the last, unless some significant additional guidance comes out from the IRS.
And so today we want to talk about two separate pieces of guidance that recently came out: One, IRS Notice 2021-49 and IRS Rev Proc 2021-33. Both of these gave us some pretty significant guidance that we can use when we’re analyzing and qualifying and quantifying and documenting businesses for the Employee Retention Credit.
First, I want to go through a couple of the key aspects that came out of the Rev Proc 2021-33. The first one I’d like to discuss is the inclusion of certain things in gross receipts. And so what Rev Proc 2021-33 says, is that we do not include in gross receipts, PPP loans—which we assumed that—Restaurant Revitalization Grants or fund money that we received, or the Shuttered Venues Grants. So none of those are to be included in gross receipts—and we use gross receipts, obviously to figure out if a business had had a significant decline in gross receipts in either 2020 or 2021. In 2020, that Safe Harbor rule is a 50% decline in gross receipts when we compare to ’19, and in ’21, that’s a 20% drop in gross receipts when we compare to ’19. So it eliminates, or it says we do not have to include those income sources—those sources of additional potential revenue as revenue for calculation of the Employee Retention Credit.
And then the other question that we’ve got often when we’re talking about gross receipts is, what method do we use to determine gross receipts? It it cash, is it accrual? Well, in this Rev Proc, the IRS has come out and says, “We use the same method of accounting that we use for income tax purposes when we calculate the drop in gross receipts for Employee Retention Credit.” So two nice changes, or two changes, at least, of clarification that came out in Rev Proc 2021-33.
Now in IRS Notice 2021-49, they also talk about Shuttered Venues Grants and the Restaurant Revitalization Fund. And what they’ve said now is that we can double dip on the wages that we use for the Restaurant Revitalization Fund and the Shuttered Venues Grants. We can double dip—we can use the same wages for both of those. They have come out and said that double dipping with the PPP wages is still not permitted. So there was some additional guidance we got from IRS notice 2021-49.What method do we use to determine gross receipts? It it cash, is it accrual? Well, the IRS says we use the same method of accounting that we use for income tax purposes when we calculate the drop in gross receipts for the ERC. Click To Tweet
Another couple of key things in that same notice affect the restaurant industry pretty significantly—or any industry that has tipped employees. And two pieces of guidance came out: One says that tips are a qualified wage for the Employee Retention Credit. So any tipped employees, any wages that we use for W-2 purposes for a tipped employee, those wages are eligible for the Employee Retention Credit. And that’s been a significant question sitting out there. I thought that that was included all along, and it was nice to see that the IRS came out with that clarification.
The other thing they did regarding tips was, there’s a federal tip credit available for businesses that have tipped employees, including tips on their W-2s. And what they said is that if you take the tip credit, you know for these tipped wages, that does not negatively affect—or it doesn’t cause a double dip at all—for the Employee Retention Credit. So you can take the tip credit, you can take the Employee Retention Credit—you do not have to worry about the interaction between both. So another nice piece of guidance that we got from the IRS.
Another piece of guidance that came out in that same IRS notice is something we’ve been waiting for, something we’ve been hoping to get from the IRS. It did not end up being the way we had hoped it would be, but in reality, the IRS did the interpretation, I think, correct on this. And that piece of information is wages paid to majority owners of a business—somebody that owns more than 50% of a business. And the question’s always been, “are they allowed to be used in the calculation of the credit?” From day one, we’ve said that any of their relatives are not included in the calculation of the Employee Retention Credit. I think that’s pretty straightforward, and when you look at the IRS code that we can’t do that, but we were hoping that majority owners would be able to be used in the calculation of the credit. Unfortunately, the guidance came out and says, “No, anybody that owns more than 50% of a business cannot be used in the calculation of the Employee Retention Credit, unless they have no living ancestors, or lineal descendants.” Which is odd. It’s based on IRS code, and that’s pretty much what it says, it’s just a strange way to look at this.It's hurting the mom and pop shop. It's hurting the small business. When you look at the tax code, it is the right interpretation. My hope was that somehow we would get a different version of this, and not harm the small business owner. Click To Tweet
What this is doing—it’s hurting the mom and pop shop. It’s hurting the small business. If we have, you know, 50 owners of a business, and they all own 2%, they can all be used in the calculation of the credit, and that’s probably a fairly big business. If we have, you know, one owner, or two owners—husband and wife—or you know, multiple owners, but they’re related, then they can’t be used in the calculation of the credit. Again, when you look at the tax code, it is the right interpretation. My hope was that somehow we would get a different version of this, and not harm the small business owner. But you know, that’s the way it is. And that’s the interpretation, and again, in my mind, the interpretation the IRS put out was correct.
In addition to that piece of guidance we’ve been waiting for, we were also waiting for guidance on the reduction of expenses for the credit. We’ve known all along, we have to reduce the income tax expenses by the amount of the credit. And our hope was the timing of that would be when we received the benefit rather than when the wages were incurred for the credit. And what IRS has come out in this guidance, says, if we had claimed a 2020 Employee Retention Credit using obviously 2020 wages, then the income tax effect has to happen on the 2020 tax return.
The problem with that is most businesses, if not all, have filed their 2020 tax return already, and so in order to make this adjustment, a small business is going to have to go back and amend their 2020 tax return. You know, if it’s a C Corp, okay, one tax return. If it’s a passthrough entity, multiple tax returns, depending on the number of members, partners or shareholders in the business.
So this is obviously going to put a burden on small business owners. Now we have additional filing requirements, we’re going to have to pay additional fees to get our tax returns amended, and not only is this going to put a burden on taxpayers, it’s going to put a burden on the IRS who is working like crazy already to dig out from under all of the filings they have already. And so again, is that the right interpretation? Yes, based on the tax code, this is the way it was. Were we hoping that they would allow us to do it in a subsequent year, and just have a timing issue instead of claiming this on a 2020 return—we’ll claim it on the ’21 return? We had hoped for that. Do I still feel that that’s possible that we could get some relief on that? I think it’s possible, but based on the guidance we have now, what we need to do is put it on the 2020 return.
Now for ’21 credits, most businesses won’t be affected by that yet, and we’ll have time to get it on that ’21 return. If a business has already filed a 2020 income tax return, what I would suggest and this is, you know, no guidance on my part, but what I would do personally as a taxpayer is I probably would wait until I receive that benefit, and then I would go back and amend my tax return. One, that may give us time to see if Congress or the IRS somehow comes out and says, you know, “Rather than put this burden on taxpayers and the IRS, we will change this requirement, and we will allow the adjustment to be done on the subsequent tax year.”
Could that happen? It could. But also it allows us to wait and see that we actually got the benefit that we applied for. If we applied for $100,000 credit, and for some reason only 80,000 came, well, I’m going to amend my tax return for 80,000, not 100. If I already amended it for 100, I’ve got to go back and make another amendment to amend it for 80,000. So it gives us time. And the IRS has come out and said there is going to be no penalty assessed as long as this was done in good faith, you know, that you were relying on the information that you knew at the time. And so I don’t see that a penalty would come on any of these taxpayers for this. Now, there may be interest, there may be interest for sure. But penalties, no.
So those two items, not the way we wanted the interpretation to come out, the way we expected it to come out. Could we get additional guidance in the future from Congress on this? It’s potential. I wouldn’t hold your breath on it, but I feel it would be the right thing to do.
A couple of additional smaller items that they addressed in the notice were the 2021 look-back periods. We can qualify a quarter in 2021 by either showing a 20% drop in the current quarter, or a 20% drop in the prior quarter. And what the IRS came out in this notice is to say, if we use this alternative method, looking back at the prior quarter, that won’t disallow us from using the current quarter methodology in the future. And so we were not locked into one methodology once we select it for a quarter—each quarter stands on its own, and we can do the prior quarter qualification or the current quarter qualification.
And then another thing that they came out with was talking about when we’re looking at full time employees, to determine if we’re a large employer or a small employer. And small employers get to use all of the employees in the calculation of the credit, and large employers only get to use employees that were being paid while they were not working in inclusion in the credit. And so what they did is they came out—and 2019 is our base period for determining if we’re a large employer or a small employer, and then this guidance, what they said is, and what they clarified, and what we thought all along—but it was nice that they came out with this clarification—is what they said is in 2019, we only count full-time employees when we’re looking at that headcount. We don’t look at part-time employees at all, we don’t look at them as partial employees, we don’t look at them as full-time equivalents adding up part-time, we only count people that were working full-time to determine if we’re a large employer or a small employer.
And then the last two things that I want to touch on that the notice came out and talked about, was the two new credits. They’re eligible on the third and the fourth quarter of 21. And that’s first one is the Recovery Startup Business. The Recovery Startup Business is any business that started after February 15, 2020, and meets an income requirement, which is less than a million dollars of average gross receipts. Average gross receipts, the definition came out, obviously, if you started after February 15, you’re not going to have three years’ history of gross receipts. And so they tell us how we calculate that average gross receipt, which is fine.
But what they’ve also said is that the recovery startup business automatically qualifies for the credit in the third and fourth quarter of ’21. They don’t have to meet a drop in gross receipts, they don’t have to meet a government restriction to qualify. They are limited to $50,000 per quarter, you know, based on the way the code is written, or the legislation’s written, but the confusion for some people had been, “Is that the only quarters they’re eligible for?” And this guidance came out and said no. You know, anytime after they started, they can still qualify in 2020, after they started in business, or in the first two quarters of ’21, under the normal rules—under the reduction of gross receipts. And obviously, there’s going to be a special rule in place in how we calculate that reduction in gross receipts for a startup, but they can qualify with a reduction in gross receipts, and they can still qualify if their business has been restricted by a government mandate. And so that recovery startup business is not just limited to credit to the third and fourth quarter of ’21, but can qualify for pretty much any quarter after they started in business.
And the last thing that comes into play in the third and fourth quarter of ’21 is the Severely Financially Distressed Businesses. And what these are is large employers—this only affects large employers—and what this says is, if you’re a large employer, and you’re considered severely financially distressed, then you can ignore the large employer rules where only the credits available employees that you’re paying not to work. You get the credit like a small employer would, and you get to calculate the credit on every employee.
And so those are the last two things that really are highlights from the two new pieces of guidance that came up. Again, the Employee Retention Credit is a huge topic out there with a lot of CPAs, a lot of businesses—there is still a lot of misinformation. And the last I heard, the Employee Retention Credit is actually being underutilized. I mean, this is a couple months ago I heard this, but it’s being underutilized right now. So I think a lot of businesses don’t realize they qualify.
So if you have any additional questions or you want some information on the Employee Retention Credit, you can always reach out to me. You know, you can reach out to me on our website, which is Tri-Merit.com. You can go to meet the team page there, you can get my contact information; you can probably find me on LinkedIn and other places as well.
And one last thing that I want to let you know before I sign off here today: I have some exciting news that we are going to be hosting a virtual conference: The Unique CPA Virtual Conference. It’s very exciting to me. We are actually in this first year going to give this out for free to our listeners—to anybody that’s interested—we’re going to have some very exciting speakers talking on, you know, employee engagement, employee retention, retaining and attracting employees. We’re going to have a speaker talk about partner compensation, and how to do it right, and how to keep everybody happy. We’re gonna have another speaker talking about—which I think is very timely—building a virtual niche practice, which obviously, we’re all used to the virtual, or the remote work right now. And so I think this is going to be really interesting.I have some exciting news that we are going to be hosting a virtual conference: The Unique CPA Virtual Conference. Click To Tweet
We’re going to have an optional craft beer tasting at the end of the event—and it is going to be a virtual event. So we would have to get orders ahead of time on the beer. But that’ll be a lot of fun. And I am going to speak at the event too, talking about all the incentives out there available for taxpayers. Our taxpayers—our clients—are used to incentives now. They’re used to PPP loans, they’re used to the Employee Retention Credit, to Shuttered Venues, to Restaurant Revitalization. They’re used to this. And what we need to do is, we need to educate them on other permanent parts of the tax codes, for credits and incentives, and help them save money on an ongoing basis. So I’ll be talking about some of those additional ways they can save tax dollars and potentially even put refunds back into their business.
So that’s exciting. Look for more information—that’ll come out soon. But I am extremely excited about that, and just as a last note, that will be December 2. We know the date. And so that’ll be coming up before we know it. But I just wanted to share that with you. More information will be coming out on our website, on LinkedIn, on probably all the social media outlets out there.
Well, thanks for listening to this, probably the last episode on the Employee Retention Credit—again, unless there is significant additional guidance that comes out with the IRS. Next week, we will go back to having a guest and I look forward to seeing you then.
About the Guest
Meet the Host
Randy Crabtree, CPA
Randy Crabtree, co-founder and partner of Tri-Merit Specialty Tax Professionals, is a widely followed author, lecturer and podcast host for the accounting profession.
Since 2019, he has hosted the bi-weekly “The Unique CPA,” podcast, which ranks among the world’s 10% most popular programs (Source: Listen Score). You can find articles from Randy in Accounting Today’s Voices column, the AICPA Tax Adviser (Tax-saving opportunities for the housing and construction industries) and he is a regular presenter at conferences and virtual training events hosted by CPAmerica, Prime Global, Leading Edge Alliance (LEA), Allinial Global and several state CPA societies. Crabtree also provides continuing professional education to top 100 CPA firms across the country.
Schaumberg, Illinois-based Tri-Merit is a niche professional services firm that specializes in helping CPAs and their clients benefit from R&D tax credits, cost segregation, the energy efficient commercial buildings deduction (179D), the energy efficient home credit (45L) and the employee retention credit (ERC).
Prior to joining Tri-Merit, Crabtree was managing partner of a CPA firm in the greater Chicago area. He has more than 30 years of public accounting and tax consulting experience in a wide variety of industries, and has worked closely with top executives to help them optimize their tax planning strategies.