Are business owner wages qualified for Employee Retention Credit?Articles
A few weeks ago, Forbes published an article highlighting the fundamental misunderstandings about the Employee Retention Credit (ERC) and the reason why small and mid-sized businesses are missing out on billions of dollars. The latest guidance that the IRS issued last week illustrates how confusing this tax credit is and why many CPAs and business owners are still leaving money on the table.
Generally speaking, the Employee Retention Credit was established to help employers whose operations were suspended, either partially or fully, by a government order due to COVID-19, OR had a significant decline in gross receipts, OR began carrying on business after February 15, 2020. This credit provides up to $5,000 per employee, per year for 2020, and up to $7,000 per employee, per quarter for 2021. ERC is very different from PPP. While PPP was carried out via banks, ERC is a tax credit, which can be claimed via tax forms.
The rules around ERC are complicated. One of the common questions being asked is whether wages paid to a business owner and the owner’s spouse may be treated as qualified wages for purposes of ERC. The answer from the IRS’s latest guidance may surprise you.
The IRS notice 2021-49 states as follow:
“The Treasury Department and the IRS have been asked whether wages paid to an employee who owns more than 50 percent (majority owner) of the value of a corporation may be treated as qualified wages, as well as whether wages paid to a spouse of a majority owner may be treated as qualified wages.”
“Applying the rules of sections 152(d)(2)(A)-(H) and 267(c) of the Code, a majority owner of a corporation is a related individual for purposes of the employee retention credit, whose wages are not qualified wages, if the majority owner has a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant. That is, applying the constructive ownership rules of section 267(c), the direct majority owner’s ownership of the corporation is attributed to each of the owner’s family members with a relationship described in section 267(c)(4); further, because each of those family members is considered to own more than 50 percent of the stock of the corporation after applying section 267(c), the direct majority owner of the corporation would have a relationship as defined in section 152(d)(2)(A)-(H) to the family member who is a constructive majority owner. Therefore, the direct majority owner is a related individual for purposes of the employee retention credit.”
“In the event that the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in section 267(c)(4) of the Code, then neither the majority owner nor the spouse is a related individual within the meaning of section 51(i)(1) of the Code and the wages paid to the majority owner and/or the spouse are qualified wages for purposes of the employee retention credit, assuming the other requirements for qualified wages are satisfied.”
Per this guidance, to answer the question whether wages paid to a business owner are qualified wages for ERC, one needs to look into whether the business owner has any brothers, sisters, ancestors or lineal descendants.
We do not know if this is the IRS’s conclusion on this matter. We will update this article if the above guidance is withdrawn or a new relevant guidance is issued.
For more information, contact Dao CPA, PC, member of Accounting in a Box.
Reference: IRS’s Notice 2021-49
**DISCLAIMER The information provided in this article is for informational purposes only. It may be time sensitive and changed after publication. It is indicative only and non-exhaustive. It does not constitute professional advice, nor should it be considered a substitute for advice on your specific situation from your advisors.
**Updated on 08/19/2021