The Consolidated Appropriations (CCA) Act of 2021, signed into law on December 27, 2020, changes the employee retention credit. Some of the changes retroactively modify the Coronavirus Aid, Relief, and Economic Security (CARES) Act, while others are prospective beginning in 2021.
CARES Act Background
The Employee Retention Credit (ERC) was passed under the CARES act and allowed employers to claim a payroll tax credit of 50% on employee qualified wages from March 13 – December 31, 2020. Wages include the employer portion of group healthcare costs to the employee. This act allows employers to claim $10,000 per year maximum eligible wages per employee. Due to the 50% credit, a $5,000 annual credit resulted. Employers could not claim this incentive if the loan forgiveness provisions were applied as part of the CARES act.
To qualify for the credit, an employer must meet the following:
- The employer must have carried on a trade or business during the calendar year 2020
- The operation of the trade or business either:
- Was fully or partially suspended because of government restrictions due to COVID-19, or
- Had gross receipts for at least one calendar quarter that are less than 50% of the gross receipts received during the same calendar quarter in the prior year. Once there is a 50% drop in revenue, the credit continues to the next quarter until quarter-end gross receipts are restored to over 80%.
Lastly, there is an employee count threshold.
If an employer had over 100 full-time employees, the ERC is only available on wages paid to employees for not working.
For employers with 100 or fewer employees, the credit is available for all employee wages. The employee headcount threshold will be based on the 2019 average number of employees.
It’s important to note that for both the gross receipts test and the employee count, aggregation rules are considered. Per Internal Revenue Section 52, corporate taxpayers may be required to aggregate as a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group of corporations and treat the affiliated group as a single employer.
Consolidated Appropriations Act of 2021
Impact on the period March 13 to December 31, 2020
The Employee Retention Credit wage requirements and limits are not changed with the Consolidated Appropriations Act of 2021. Still, it does allow anyone who took out a Paycheck Protection Program (PPP) loan to claim the ERC. This is the retroactive change mentioned earlier in which Employers may go back and claim the ERC on 2020 wages.
However, the ERC and PPP loan forgiveness cannot be claimed on the same wages. Wages are first applied to the ERC and then to PPP loan forgiveness.
The catch-up credit can be claimed on the 2020 fourth-quarter Form 941, which is due February 1, 2021. However, many taxpayers have completed (or are close to completing) their 2020 payroll calculations. Without any other guidance, eligible taxpayers may claim the ERC retroactively by filing amended quarterly payroll tax returns form 941-X for calendar quarters of 2020 that they were eligible.
Consolidated Appropriations Act of 2021
Impact on the period January 1 to June 30, 2021
While the ERC was initially set to expire at the end of 2020, the credit is extended to include the first two quarters of 2021. The original law had qualified wages from March 12 – December 31, 2020, where the new law now includes qualified wages from January 1 – June 30, 2021.
The CAA lowered the bar, making it easier for employers to be eligible for the credit in 2021. While the old and new law both include business operations that are either fully or partially suspended because of COVID-19, the gross receipts benchmark for 2021 is more favorable. Where the 2020 gross receipts in a quarter had to be less than 50% of gross receipts for the same quarter in 2019, the ERC lowered the threshold for 2021. The gross receipts, taking into account the aggregation rules of affiliated corporations, if applicable, only have to be less than 80% of comparative quarters in 2021 compared to 2019.
Another beneficial provision of the Consolidated Appropriations Act of 2021 is the change in the number of eligible employees. The CAA raised the threshold to 500 employees (from 100), so for the first two quarters of 2021, a company with 500 or fewer employees will be eligible for the credit even if the employees are working. Similar to the CARES Act, the aggregation rules are still applicable. Therefore, in calculating the 500-employee threshold, the employees of all affiliated companies sharing more than 50% shared ownership are aggregated.
The amount of the credit is more advantageous in 2021 as well. Effective January 1, 2021, the credit is increased to 70% (up from 50%) of qualified wages and was amended to include the cost to continue providing health benefits to furloughed employees. Qualified health plan expenses paid by an employer were initially eligible for the ERC only when they were paid on behalf of employees receiving other wages. The maximum credit amount was also increased. Effective January 1, 2021, the credit cap is increased to $7,000 per quarter of the first two quarters ($10,000 qualified wages x 70% tax credit rate). This maximum credit of $14,000 per employee for 2021 is available even if the employer received the $5,000 maximum credit for the employee in 2020.
Another benefit as a result of the CAA is that the Treasury is allowing an advanced payment of the credit for companies with 500 or fewer employees. The advanced credit is based on 70% of the average quarterly payroll for the same quarter in 2019. This obviously accelerates the distribution of the credit based on an estimate. There will be a true-up at the end of the quarter, and if the actual credit is less than the advancement, the excess will have to be repaid.
Summary
The Employee Retention Credit introduced in the CARES Act was one of the initial tax provisions to assist employers affected by the COVID-19 pandemic. The CAA made significant changes to the credit to assist employers further. Thresholds were lowered, limitations were loosened, and the maximum credit was increased, allowing more employers to be eligible to receive aid during this critical time.
Contact the CDH Tax team for questions or to learn more about the Employee Retention Credit.