IRS Launching ‘Bizarre’ New Punishment for Small Businesses

Most IRS guidance documents make for poor pleasure reading. Then again, most IRS guidance doesn’t effectively impose a retroactive tax on small business owners merely for having a family. IRS Notice 2021-49, issued on August 4, includes a bizarre interpretation of the law that will effectively raise taxes for business owners with close relatives, even if their family members have no involvement in the company.

A core goal of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed early on in the pandemic was to assist businesses in keeping employees on their payroll even as they dealt with the economic effects of lockdowns. Part of the plan was the Employee Retention Tax Credit (ERTC), which provides a tax credit against employer payroll tax liabilities.

By the time the ERTC is set to expire at the end of 2021 (though the bipartisan infrastructure bill would end eligibility earlier, at the end of September), the Joint Committee on Taxation estimates that employers will have claimed just under $36 billion as a result of it. But if the IRS gets its way, business owners, especially those owning smaller businesses, will owe a lot of that back.

That’s because the IRS somehow managed to conclude, through ridiculous mental gymnastics, that wages paid to business owners are ineligible for ERTC if that owner has a sibling, parents, or children. No, not immediate family members who are involved in the business in any way — simply the existence of familial bonds at all is sufficient to disqualify business owners from claiming the ERTC on their own wages. Keep in mind that, under Notice 2021-49, business owners are still perfectly free to claim the ERTC on wages paid to themselves so long as they lack these familial ties.

Here’s how the IRS arrived where it did. The CARES Act used legal eligibility requirements laid out in the Work Opportunity Tax Credit (WOTC), which disallows the credit for wages paid to close relatives and to any individual controlling more than 50 percent of the business in question. Business ownership shares are determined by Section 267 of the Internal Revenue Code, which counts shares owned by close relatives of the majority owner as being owned by the majority owner themselves, in order to prevent abuse by shifting shares to close relatives. (Read more from “IRS Launching ‘Bizarre’ New Punishment for Small Businesses” HERE)

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