Employee Retention Credit Qualifying Wages

What happens if the daughter was already working in the business? Seems arbitrary to not include a valid employee. Again, the fairness of the law is irrelevant and a discussion for another time. Regardless of the intent, is it fair to say that wages for employees that are related that do not own the corporation are not eligible for the retention credit?

How does 267(c) play into all of this? Example: Mother owns 100% of S Corp business and daughter owns 0%. Both mother and daughter get W-2 wages.

Under 267(c), doesn't daughter get attributed ownership of the S Corp?

So if the daughter were a shareholder and owned less than 1%, would she then be able to qualify but if she were not a "shareholder" she wouldn't qualify?

And if we were to look at the literal meaning, if 267(c) were to apply, and the daughter is then deemed to own 100%, then neither mother nor daughter would qualify under 51. Because then the mother would be related to the daughter for IRC 51 purposes?

Is there any guidance in regards to timing of PPP wages and Employer retention credit? I'm in NY where basically all businesses were shutdown From late March through June 1st.

For example:
employer shutdown 4/1 - 5/31/2020. Wages paid during this period are $20,000. Employer also has a PPP loan of $20,000. During the 24 week covered period, total wages were $80,000. For ERC the only wages qualifying are during the temporary shutdown. Loan forgiveness already applied for and received.

Would this employer be able to claim ERC for the $20,000 of wages during shutdown and deem them not part of the PPP loan forgiveness? It seems logical and there is no "double dip."

Even if the dog is in the AKC Working Group?

Len, thank you..... I needed a laugh today

Regarding bmgcpa22, also do we file a Form 941-X to get this "retroactive" ERC?

Either can file on Q4 941 if not filed. If filed, will have to do a 941-X.

Regarding bmgcpa22's post regarding coordination of PPP loan forgiveness wages and employee retention credit wages-
"For example:
employer shutdown 4/1 - 5/31/2020. Wages paid during this period are $20,000. Employer also has a PPP loan of $20,000. During the 24 week covered period, total wages were $80,000. For ERC the only wages qualifying are during the temporary shutdown. Loan forgiveness already applied for and received.

Would this employer be able to claim ERC for the $20,000 of wages during shutdown and deem them not part of the PPP loan forgiveness? It seems logical and there is no "double dip.""

Has anyone found out yet regarding wages paid in both the PPP covered period and the govt shutdown period, is it applied chronologically against PPP loan forgiveness first or can we do as bmgcpa22 inquires about? In other words, can we choose any period time in the 24 week PPP covered period receive PPP loan forgiveness and thus allocate the remaining wages to the employee retention period?

This issue of whether we can pick and choose which wages apply to the PPP and which do not is an important one. I would think the government position would be earliest wages would be applied first from a PPP standpoint but who knows?

my understanding is that it is first applied against the ERC unless the taxpayer elects out under Section 206((c)(2),Section 2301(g)(1) . However since they already received forgiveness it would seem that they cannot go back and apply cost to ERC. would the taxpayer qualify for ERC under the second scenario- a drop in gross receipts? If so once a taxpayer qualifies in one quarter wages paid after that quarter are eligible until the quarter in which revenue is at least 80% of the corresponding 2019 quarter.

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If so once a taxpayer qualifies in one quarter wages paid after that quarter are eligible until the quarter in which revenue is at least 80% of the corresponding 2019 quarter.

You mean it ends in the quarter AFTER the quarter in which revenue is at least 80% of the corresponding 2019 quarter.

https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-general-information-faqs

4. What is a "significant decline in gross receipts"?
A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Agree thanks for clarify

This article is a very good explanation of why >50% owner wages are not elligible for ERC:
https://www.currentfederaltaxdevelopmen ... areholders

Upon more detailed reading of the various sections, I am going to disagree with the splash-back problem. This has been bothering me for a while now given the propensity of the IRS to be very enthusiastic about letting the owners of small businesses know when they are not allowed to take tax provisions. This makes the FAQ #59 that only references relatives and not owners particularly interesting. So how did I get to disagreeing with splash-back being an issue? Because the IRC separately defines Direct, Indirect, and Constructive ownership in Section 958. They are each distinct. The language of 51(i)(1)(A) clearly references directly or indirectly (...who owns, directly or indirectly, more than 50 percent in value...) and makes no reference to constructive. The reference to 267(c) is admittedly confusing, but nothing in that section states that constructive ownership leads to direct or indirect ownership, it is simply providing guidance for use of 267(b). No idea why it was dropped into 51(i)(1) in the first place, but it would not be the first time Congress wrote something baffling.

This would suggest that a 50% or more owner of an s corp or a c corp that takes the employee retention tax credit for themselves or their spouse would not be taking an aggressive position.

There are multiple sets of ownership attribution rules in the code that exist for different purposes. We have to be careful to understand which one applies to the particular circumstance we are looking at. We can't mix them.

For example, Section 958 as you reference does give us attribution rules - but only for the purposes of Sec 951 to 964 (rules around foreign income). Section 1563 provides another set of attribution rules that are used as part of a determination of whether multiple businesses are a controlled group (these rules are the most commonly seen set as controlled group determination affects retirement plans, ACA large employer determination, >$25M gross receipts for small taxpayer methods, and more). Yet another set of ownership attribution rules are found at Section 267(c). These rules are referenced by Section 51 (Work Opportunity Tax Credit) which in turn are referenced by the Employee Retention Credit. Which is why we are here. You can't argue that 958 affects 267(c) because they are separate sets of distinct rules. There is no cross reference.

Under 267(c) you have both direct ownership and indirect ownership. The terms "indirectly" and "constructively" are used interchangeably both in 267(c) itself and the regs of 267(c). I would highly recommend reading the regs if you are digging into this issue. The regs expound on attribution well with more explanations and examples. https://www.law.cornell.edu/cfr/text/26/1.267(c)-1

The reason 267(c) is referenced in 51(i)(1) is that there had to be a definition for direct and indirect ownership language in that code. 51(i)(1) doesn't give a new definition. Instead it points to the existing definition of 267(c).

We are stuck with 267(c) for ERC purposes. The IRS covers this in their FAQ rules too - directly and indirectly. So we have to determine who all the>50% owners are (both directly and indirectly) first and then apply "the list" of disqualified relationships to all of these owners. So we are back to disqualification for >50% owners when their ownership attributes to the ancestors, descendants, and siblings and the creates a disqualified relationship for the direct >50% owner to the indirect >50% owner.

Yes, it's possible the congress could change the law or the IRS could interpret favorably (by going against the code as written). But both of these scenarios are unlikely. In the meantime there is no reasonable basis to claim ERC for >50% owners. So practitioners risk preparer penalties to take such a position. Don't do it.

I'd also recommend using any research software you have to read up on 267(c) to understand "directly and indirectly". The examples are very helpful. Checkpoint has a good amount of related content. Here is one: https://www.dropbox.com/s/ayoripqek5sad ... t.PDF?dl=0

Also Ed Zollar's video is a great way to summarize this problem. ERC issue starts halfway: https://vimeo.com/532885005

Also worth noting another fantastic article newly published. Tom Gorczynski originally had said owners get ERC (as everyone did), but now has written about the 267(c) problem in good detail here: https://www.tomtalkstaxes.com/p/tom-tal ... il-30-2021

I certainly note the concern due to the lack of precise language used in the act. Also noted that Gorczynski circles back to Ed Zollars, who points out the the JCT considered it obvious in 2015 that owners were not eligible for WOTC. This is very true, but has more to do with 51(d)(12) and 51(d)(13)(A & B), than it does with 51(i)(1). WOTC eligibility is determined by the Department of Labor Employment and Training Administration (ETA), with guidelines laid out in ETA Handbook 408: https://www.dol.gov/sites/dolgov/files/ ... dition.pdf And sure enough, in section III.C.6 they discuss nepotism. III.C.6(a) lists the relationships from 51(i)(1)(A) that are also listed in IRS FAQ 59, III.C.6(b) covers dependents from 51(i)(1)(C), and III.C.6(d) has the employees of estates and trusts language from 51(i)(1)(B). Interestingly, III.6.C(c) includes a long list including:

This rule also applies if the individual who is a member of a targeted group is:
(1.) The employer, i.e., self-employed;
(2.) A shareholder who owns more than 50 percent of the value of the outstanding stock of the employing corporation;
(3.) A beneficiary, grantor, or fiduciary of the employing estate or trust;
(4.) A member of an employing partnership; or,
(5.) A shareholder in a Subchapter S corporation that is the employer.

Of course (3.) is a duplicate of III.C.6(d), and if we use the ETA language as our guidance for interpreting 51(i)(1), then all S corp owners are ineligible, regardless of ownership percentage. However, a spouse would be eligible.

This appears to come from ETA procedures, as I cannot find any reference to code sections. And most important, even using the envisaged splash-back provisions of 267(c) would not preclude an only-child owner without their own children and whose parents have died. And of course (5.) has zero code support as worded (neither would (4.), but of course partners cannot be W-2 employees anyway).

My own feeling is that the IRS would be more than happy to tell owner employees to get lost if they believed that position to be valid.

I have heard third-hand that the IRS was unaware of the 267(c) problem with ERC to owners until the topic emerged in February. The same rumor indicated the IRS plans to issue guidance on the topic soon.

Another summary article on the problem:

https://evergreensmallbusiness.com/when ... on-credit/

I tried to warn you here. Now the IRS confirms in plain English:

https://www.irs.gov/pub/irs-drop/n-21-49.pdf