Employee Retention Credit and "Related Individuals"

The more I dig into this topic, the more confused I became. Opinions are all over the place. And most of them are from well-respected people in taxation area. Does anyone know why the IRS does not make official guidance on all these issues? I think they know too that everyone is trying to speculate and interpret these confusing rules in vain, is it right?

In the Ed Zollars video referenced here, he "felt" that the PPP loan forgiveness amount could count as revenues when computing whether a company qualifies for the ERC for a quarter. I haven't heard of this before now. This could be a significant factor for many companies. Do others have thoughts on this?

There is no specific guidance on whether PPP is gross receipts for ERC qualification purposes. The best argument I have heard is that the CARES Act specifically excluded PPP from gross receipts. So while tax preparers this of is as tax exempt income (which is gross receipts per regs), it is really a gross receipts exclusion to begin with. So something else entirely. I like this argument, but don't have any certainty on how it will be viewed.

The more I dig into this topic, the more confused I became. Opinions are all over the place. And most of them are from well-respected people in taxation area. Does anyone know why the IRS does not make official guidance on all these issues? I think they know too that everyone is trying to speculate and interpret these confusing rules in vain, is it right?

Have you read something from a well-respected person that addresses the 267(c) attribution problem itself and still says owners are okay? I have not. Everyone was saying owners get ERC until the problem came to light. Some still may not be aware of the problem or their article you find is old. A few have recently still said that owners are okay, but they conveniently ignore the 267(c) attribution issue which is the whole problem to begin with.

I couldn't find anyone saying 267(c) caused a problem for owners and ERC until February 2021 https://twitter.com/danchodan/status/13 ... 7987017729 . Before that everyone said that owners get ERC.

The IRS wasn't aware that this was a debate before then (as I've heard through the grapevine). The AICPA sent a letter to the IRS requesting guidance at the end of February https://www.aicpa.org/content/dam/aicpa ... -25-21.pdf . The AICPA has continued to say that it is on the list of issues they are waiting on the IRS for guidance. So we should see it eventually.

I also wish IRS would clarify this. It makes absolutely no sense that they would allow the wages of a 49% shareholder to count toward the ERC, but not the wages of a 51% shareholder, when both of those individuals would be limited to the cap of $10,000 each. I understand not allowing the wages of individuals related to them, as the 51% shareholder has the ability to add those relatives to the payroll in order to get ERC funds. Shareholders themselves are required to draw a salary if active, and they would be limited as to the amount of ERC they could get.

I also wish IRS would clarify this. It makes absolutely no sense that they would allow the wages of a 49% shareholder to count toward the ERC, but not the wages of a 51% shareholder, when both of those individuals would be limited to the cap of $10,000 each. I understand not allowing the wages of individuals related to them, as the 51% shareholder has the ability to add those relatives to the payroll in order to get ERC funds. Shareholders themselves are required to draw a salary if active, and they would be limited as to the amount of ERC they could get.

But the 51% shareholder has control to make wages whatever they need to be to get the max ERC. 49% shareholder doesn't have control to do that. This is the whole reason these rules revolve around >50%. It's also about control

Another summary article on the problem:

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

Does this mean that a 50/50 owned husband/wife s corporation, where they are both employees, are each attributed to 100% ownership when we apply the family attribution of ownership rules and thus do not get ERC?

Or do we still not really know until the IRS provides guidance or it goes to court?

Yes. Ownership attributes to both a husband and wife under 267(c). To be disqualified to ERC however, their ownership would have to attributes to another relative like their child. Their child would be a 100% owner after attribution and now both husband/wife have a disqualified relationship to a >50% owner. No ERC.

51(i) and 267(c) are the rules. IRS guidance already told us ownership needs to be determined "directly and indirectly" which is a reference to these 267(c) attribution rules. I do not believe there is a reasonable basis to ignore these rules.

So in that example, the parents are out of luck because they have a child, but if they had no child they would not be?

Maybe. 51(i) disqualified relationships mixed with attribution is tricky. A spouse is not a disqualified relationship - so if there were no relatives, yes, each owner is considered 100% due to attribution. However they still get ERC because they do not have a relationship to a disqualified person (again spouses aren't on that list). This has been refered to as the "no living relatives" loophole.

Attribution under 267(c) is to spouses, siblings, ancestors, and decendants. Each ownership structure and family tree is different to follow these rules through. It's easier to say ">50% owners don't get ERC". But the reality is that NEARLY ALL >50% owners don't get ERC when you apply the family attribution rules. The second statement is more technically correct, but everyone just prefers to hear a yes/no answer instead of walking through the rules.

Here is a template to follow to figure out related parties for ERC and whether or not they are disqualified: https://twitter.com/danchodan/status/13 ... 78308?s=19

not an impossible result, marriage penalties are certainly nothing new in the code... just a bizarre result if that was the intent, and no business owner would understand how the differentiation makes any sense...

And neither will most accountants! It's a loophole in a convoluted mess of code already.

I don't think owner issues were ever really considered as part of the WOTC rules (which is where the 51(i) reference in ERC is pointing). Claiming a WOTC for the owner themselves would just be such an unusual approach that it likely wasn't addressed originally in that law. Claiming ERC for an owner on the other hand would be incredibly common and affects most small corps. This is why the IRS code referencing other code can become so problematic quickly. IRS may still come to our rescue with new guidance, but until they do we are stuck with the code as it's written.

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

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

Yup there it is. Pretty clear too.

Of course, I have a client that does not fit into he examples.

One client has a 51% shareholder who divorced the 49% shareholder several years ago.

The 51% shareholder has a child with the 49% shareholder, but they are certainly no longer together and they are barely on speaking terms.

But the child is related to the 51% SH of course, and is also related to the 49% shareholder, of course. The child does not work for the s corporation.

Does the child somehow disqualify the 49% shareholder's wages?

Yep. The child is attributed the ownership of both mom and dad (regardless of if mom and dad are together, they are still the child's parents). Both shareholders are disqualified. I linked my template above if you have other scenarios to run through these rules.

As I trudge through claiming the credit a just a few of my clients, I'm finding this credit to be, as someone else put, "wickedly complicated".

Do you know if an EIDL loan reduces or has an impact on the credit? I mean LOAN, not grant.

Thanks

Loans are not receipts. EIDL grant is receipts. PPP loan forgiveness is not a receipt under a new safe harbor released today (same for svog/rrf).

Released TODAY?....


OK looking for it, thanks!

Rev Proc 2021-33