Business Tax Incentives and Relief Resulting from COVID-19 Response
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized a refundable tax credit important to many employers struggling as a result of the COVID-19 pandemic.
- This credit, known as the Employee Retention Credit (ERC), has been retroactively improved and extended by the Consolidated Appropriations Act, 2021.
- Employers can now take advantage of the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) and claim ERC. This part of the new law is retroactive, allowing SBA PPP recipients to retroactively claim ERC.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized a refundable tax credit important to many employers struggling as a result of the COVID-19 pandemic. This credit, known as the Employee Retention Credit (ERC), has been retroactively improved and extended by the Consolidated Appropriations Act, 2021, signed into law in the final days of 2020.
Highlights of Changes
- Employers can now take advantage of the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) and claim ERC. This part of the new law also allows SBA PPP recipients to retroactively claim ERC.
- Although originally only available for wages paid through the end of 2020, the new law extended ERC for wages paid through June 30, 2021.
- The enhanced ERC, available Jan. 1, 2021, through June 30, 2021, is more valuable and available to more employers than before.
ERC – Effective from March 12, 2020, through Dec. 31, 2020
While the CARES Act of March 2020 added the ERC legislation, the below text in blue reflects changes made retroactively to this credit through recent legislation.
Under this provision, an eligible employer can claim a credit against the employer's share of social security taxes for each calendar quarter for an amount equal to 50 percent of qualified wages per employee, up to a maximum of $10,000 wages per employee for all calendar quarters.
The ERC is generally limited to the employer's share of social security taxes imposed on the wages paid with respect to the employment of all employees. This credit also will be reported in the employer's corresponding employment tax return, and any excess will be treated as a refundable overpayment. In anticipation of receiving the ERC, the employer can fund qualified wages by: 1) utilizing federal employment taxes that would otherwise be required to be deposited with the IRS and 2) requesting an advance of the credit from the IRS by filing Form 7200.
For these purposes, an eligible employer is generally defined as an employer that:
- was carrying on a trade or business during calendar year 2020, and
- with respect to any calendar quarter,
- such trade or business was fully or partially suspended due to a governmental order as a result of the COVID-19 emergency, or
- during which there has been a significant decline in gross receipts
The statute further provides rules regarding whether these criteria have been met. To meet the "significant decline in gross receipts," the employer compares gross receipts in 2020 to the same calendar quarter of 2019, and begins to qualify in the 2020 calendar quarter if gross receipts have declined by 50 percent and ends in the calendar quarter once gross receipts have only declined by 80 percent.
Although this credit is available to all employers, there are additional limitations for those with more than 100 employees during 2019. For these midsize employers, wages can only be taken into consideration for purposes of determining the credit for time that such employee is not providing services due to its operations being fully or partially suspended as a result of the COVID-19 emergency or during a quarter within a period during which there has been a "significant decline in gross receipts," as defined above. For all employers, the new law makes clear certain qualified health plan expenses can be included for purposes of the credit calculation, even if employers did not pay wages.
Importantly, recent law allows employers to take advantage of the SBA PPP loan and the ERC. This would include the new round of SBA PPP loans. Accordingly, employers who did not claim ERC because they had also received SBA PPP loans may want to revisit their eligibility for ERC.
Enhanced ERC – Effective from Jan. 1, 2021, through June 30, 2021
The enhanced ERC extends its availability, increases its value and expands the eligibility.
Specifically, while the ERC was previously only available until the end of 2020, the new law has extended its availability for wages paid through the end of June 2021. Under the enhanced ERC, an eligible employer can claim a credit against the employer's share of social security taxes for each calendar quarter for an amount equal to 70 percent of qualified wages per employee, up to a maximum of $10,000 wages per employee for each calendar quarter. These modifications significantly increase the value of this credit.
Under the older version of ERC, employers with over 100 employees could only claim the credit for wages paid to employees not providing services. The enhanced ERC increases this employee amount to those employers with less than 500 employees, greatly expanding the employers who can claim the credit. Finally, among the other significant changes, the ERC expanded the eligibility to those employers who experienced only a 20 percent decline in gross receipts and allows employers to continue to claim the credit in every quarter in which there is a 20 percent or more decline in gross receipts.
Although nonprofit entities continue to be eligible for ERC, the enhanced ERC also is available to public instrumentalities such as colleges or universities or those instrumentalities that provide medical or hospice care.
Additional relief is provided to employers that were not in existence in 2019 and to seasonal employers.
For more information or any questions, please contact the authors or another member of Holland & Knight's Taxation Team.
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