Update for Employers: Recent Legislation Improves, Extends Employee Retention Credit
- 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 of 2021 and the American Rescue Plan, but was then modified again by the Infrastructure Investment and Jobs Act.
- Although originally only available for wages paid through the end of 2020, the ERC was extended for wages paid through the end of 2021, but was then was eliminated early for most employers and is available for those employers only for wages paid through September 2021.
- Employers can take advantage of the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) and claim the ERC. This part of the new law is retroactive, allowing SBA PPP recipients to retroactively claim the ERC.
Please note: This alert has been updated with new developments after the enactment of the Infrastructure Investment and Jobs Act.
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 both the Consolidated Appropriations Act of 2021 (CAA) and the American Rescue Plan.
Overview of Changes Made After CARES Act
- Employers can now take advantage of the U.S. Small Business Administration's (SBA) Paycheck Protection Program (PPP) and claim the ERC.
- Although originally only available for wages paid through the end of 2020, the ERC has been extended for wages paid through the end of 2021.
- The enhanced ERC available for wages paid in 2021 is more valuable and, by lowering the threshold to qualify, is available to more employers.
- For the third and fourth quarter of 2021, "recovery startup businesses" are now eligible for the credit. In addition, "severely financially distressed" employers may be able to claim a larger credit by including all wages to calculate the ERC.
CARES Act ERC: Effective March 12, 2020-Dec. 31, 2020
Although the CARES Act, passed in 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 declined by only 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 be taken into consideration only 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 that 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 the ERC because they had also received SBA PPP loans may want to revisit their eligibility for the ERC.
The IRS issued Notice 2021-20 that provides guidance on the ERC as it applies to qualified wages paid after March 12, 2020 and before Jan. 1, 2021.
Enhanced ERC, Consolidated Appropriations Act of 2021: Effective Jan. 1, 2021-June 30, 2021
The enhanced ERC included in the CAA extends its availability, increases its value and expands the eligibility.
Specifically, although the ERC was previously available only 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 the credit.
Under the older version of ERC, employers with more than 100 employees could claim the credit only 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 number of 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 entities such as colleges or universities, or those entities that provide medical or hospice care.
Additional relief is provided to employers that were not in existence in 2019 and to seasonal employers.
The IRS issued Notice 2021-23 that expands the guidance in Notice 2021-20 and addresses the amendments to the CARES Act introduced by the CAA effective Jan. 1, 2021.
Enhanced ERC, American Rescue Plan: Effective June 30, 2021-Dec. 31, 2021
The American Rescue Plan again extended the ERC to wages paid through Dec. 31, 2021.1 The American Rescue Plan also enhanced the ERC in two important areas. However, since none of the changes were retroactive, the following rules apply only for wages paid in the third and fourth quarter of 2021.
First, the American Rescue Plan added a third category of eligible employers: recovery startup businesses. A recovery startup business is generally one that began after Feb. 15, 2020, and has an average gross receipts of less than $1 million. Although additional employers will be eligible under this new category, recovery startup businesses may claim a total of only $50,000 in ERC for the third quarter in 2021 and $50,000 for the fourth quarter of 2021.
Second, the American Rescue Plan added a special rule for those employers who are considered severely financially distressed. Although the general rule is that large employers (more than 500 average full-time employees in 2019), can claim the credit only for wages that are paid to an employee not providing services, severely financially distressed employers can take all wages paid into consideration. A severely financially distressed employer is one whose gross receipts for the calendar quarter are less than 10 percent of its gross receipts from the same calendar quarter in 2019.
Modified ERC, Infrastructure Investment and Jobs Act: Effective Sept. 30, 2021-Dec. 31, 2021
The Infrastructure Investment and Jobs Act eliminated the ERC for all employers but recovery startup businesses earlier than anticipated. Specifically, although the American Rescue Plan extended the credit through wages paid in 2021, the Infrastructure Investment and Jobs Act repealed the credit for wages paid in the fourth quarter of 2021, i.e., wages paid after September 2021. Recovery startup businesses, as discussed above, can continue to claim the credit for wages paid through the end of 2021. The IRS issued Notice 2021-65, discussing this change.
Holland & Knight Can Help
For more information or any questions about the enhanced and extended ERC, please contact the authors or another member of Holland & Knight's Taxation Team.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this alert for timely advice.
1 However, see final section of this alert, as this extension was later eliminated by the Infrastructure Investment and Jobs Act.
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