Employee Retention Credit – Expanded Opportunities for Businesses
On December 27, 2020, the Consolidated Appropriations Act of 2021 was signed into law. Among the many changes and updates to prior COVID relief legislation were clarifications and expansion of the employee retention credit that was created by the CARES Act in March of 2020.
The Consolidated Appropriations Act not only clarifies and expands the ERC, but also makes an important retroactive change: employers who took PPP loans are now eligible to take the employee retention credit, so long as the same wages are not used for both.
A summary of other key provisions of the Employee Retention Credit (and how the new legislation compares with the original law) follows.
Period of Credit Availability:
Original Law (March 27 CARES Act): Qualified wages paid after March 12, 2020, and before January 1, 2021.
New Law (December 27 Consolidated Appropriations Act): Qualified wages paid after March 12, 2020, and before July 1, 2021.
Original Law: Businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or gross receipts were less than 50% of gross receipts for the same quarter in 2019 until such quarter as gross receipts are 80% of same quarter in 2019. Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.
New Law: Beginning January 1, 2021, the credit will be available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or gross receipts are less than 80% of gross receipts for the same quarter in 2019. Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit.
Amount of Credit:
Original Law: 50% of the qualified wages pad to the employee, plus the cost to continue providing health benefits to the employee.
New Law: Effective January 1, 2021, the credit amount is increased to 70% of qualified wages, which is amended to include the cost to continue providing health benefits.
Maximum Credit Amount:
Original Law: Annual cap of $5,000 per employee ($10,000 in qualified wages x 50%)
New Law: Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages X 70%) for a possible $14,000 credit per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.
Credit Eligibility Whether an Employee is Working or Not:
Original Law: A company with more than 100 employees could not take the credit for wages paid to an employee performing services for the employer (either teleworking or working at the workplace, even though at reduced capacity due to reduction in business). A company with 100 or fewer employees was eligible for the credit, even if the employee was working.
New Law: Beginning January 1, 2021, the company size threshold increases to 500 employees. An employer with 500 or fewer employees will be eligible for the credit, even if employees are working. When calculating the 500-employee threshold, the employees of all affiliated companies sharing more than 50% common ownership are aggregated.
PPP Loan Recipient Eligibility:
Original Law: (NOTE: This provision was subsequently REPEALED with the new law.) A company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit. This disallowance rule extended to all affiliated companies that shared common ownership, so that if one company received a PPP loan, any other company with more than 50% common ownership was ineligible to claim the credit.
New Law: This change is retroactive to the effective date under the original law for wages paid after March 12, 2020. A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit. The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. A company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively. The IRS is expected to issue guidance on how to claim the credit retroactively. Companies related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively, if they are otherwise eligible for the credit.
Original Law: In 2020, there was no provision to monetize the credit before qualified wages were paid.
New Law: The IRS is expected to draft guidance to allow an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess.
Limitation on Increase in Pay Rate:
Original Law: No credit for pay rate increases.
New Law: The disallowance of the credit for pay rate increases is repealed, now allowing the credit for hazardous duty pay increases, among others.
Disallowance of Credit for Governmental entities:
Original Law: The employee retention credit was not available to any federal, state, or local governments, or any agency or instrumentality thereof.
New Law: Effective January 1, 2021, an exception will allow the credit for state or local-run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (which includes organizations such as Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions).
Definition of gross receipts for tax exempt entities:
Original Law: No definition of gross receipts as applicable to tax exempt entities was included.
New Law: The new law defines gross receipts for tax exempt entities by reference to Section 6033 of the Internal Revenue Code. Gross receipts include the following: contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income (e.g., interest, dividends, rents, and royalties). Gross receipts are not reduced for any associated costs or expenses.
There are still many questions to be answered with regard to updated forms and filing instructions. LSWG is keeping a close eye on developments. Stay tuned.