The employee retention credit (ERC), which was initially introduced as part of the CARES Act, was expanded and modified under the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021. Both of these pieces of legislation were passed by the United States Congress. Find out what these changes can imply for you personally.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into law in March of 2020. The Consolidated Appropriations Act (CAA), which was enacted into law in December 2020, enhanced and modified numerous significant benefits that were first offered in the CARES Act. Reviewing provisions that were initially restricted but now have a wider reach, such as the employee retention credit, may be of tremendous advantage to companies (ERC). However, a provision in the Infrastructure Investments and Jobs Act subsequently accelerated the expiration of the ERC from December 31, 2021 to September 30, 2021 for the majority of employers. The American Rescue Plan Act of 2021 (ARPA), which was enacted in March 2021, further enhanced and extended the applicability of the ERC.
When it was first implemented, the ERC allowed qualifying employers the opportunity to claim a credit of up to $5,000 per employee, which was based on a maximum of $10,000 in payroll costs for qualifying employees (i.e., a credit of 50% of the total amount). This was possible only if certain requirements were satisfied. However, businesses were not allowed to submit any ERC claims if they had previously received a loan from the Paycheck Protection Program (PPP). The PPP had the ability to be totally refundable (becoming the economic equivalent of a grant), and it had the potential to reduce payroll costs by a significant amount greater than $5,000 for each employee. As a result, it should not come as a surprise that several companies decided to pursue a PPP loan rather than seize possibilities to claim the ERC.
Companies that obtained a PPP loan were granted the ability to retroactively claim the ERC for qualifying expenses during the year 2020. This was a significant change that was made possible by the CAA. However, this was only applicable to payroll expenses that were not funded with forgiven PPP loan proceeds. In addition, the ERC was further expanded to permit the claiming of additional credits (70 percent of up to $10,000 in payroll costs for qualifying employees per quarter) in specific circumstances for each quarter of the year 2021. This expansion was made possible due to the fact that the ERC was further expanded.
Because of these changes in the law, there may be huge potential for companies that meet the following criteria:
- Might not have pursued claiming the ERC in 2020 or 2021 to reevaluate their eligibility had they not considered the possibility of doing so.
- Filed a claim with the ERC in 2020 in order to determine whether or not more credits are attainable in light of the loosening of certain rules.
When evaluating prospects presented by ERCs, companies, with the support of their consultants, should keep the following crucial points in mind:
During any given quarter in 2020 and/or 2021, was the operation of the business “totally or partially interrupted” as a result of an order issued by the government?
Because one of the ways to qualify for the credit is to have had a suspension of business operations as a result of an order from the government, businesses need to determine the specific order, as well as the branch or agency of the government that issued it, and determine whether or not the order actually required them to suspend their operations. Further, in situations where a business has scaled back or modified its operations in response to an order, an assessment needs to be carried out to determine whether or not the change in operations had an effect that was greater than merely nominal and, as a result, could be considered a “partial suspension” of the business’s operations.
Have there been any quarters in 2020 or 2021 in which there was a “substantial fall” in the amount of gross receipts?
One other way to become eligible for the ERC is to demonstrate a significant reduction in revenue when compared to a comparable quarter in 2019. Analyzing whether this condition is satisfied could involve some unanticipated complexities, such as determining what streams of income constitute gross receipts for the purposes of the ERC and, in the case of a business that has related entities, determining at what level businesses should be aggregated for the purposes of determining the gross receipts decline. Both of these considerations are necessary in order to analyze whether or not this condition is satisfied.
- In order to qualify for the ERC in 2020, the gross receipts of any given quarter in 2020 must be lower by at least fifty percent compared to the same quarter in 2019. If they are, then the ERC is available in that quarter. The ERC will also be accessible in each succeeding quarter of 2020, up until the end of the quarter in which gross receipts were at least 80 percent of the amount they were in the comparable 2019 quarter. Modified rules apply to businesses that launched their operations at some point in 2019, as well as to businesses that were purchased by other companies in 2020.
- If the gross receipts of any quarter of 2021 are less than 80 percent of the corresponding quarter of 2019, the ERC is available in that quarter, and eligibility continues until the end of the quarter when gross receipts were at least 80 percent of the corresponding 2019 quarter. This provision applies to the ERC for the year 2021. In order to determine their compliance with this requirement, businesses have the option of using their total gross receipts from the preceding calendar quarter. For instance, in order for the business to determine whether or not it would be eligible for ERC funding in the first quarter of 2021, the company may compare its gross revenues from the fourth quarter of 2020 to those from the fourth quarter of 2019. In addition, businesses that didn’t exist in 2019 but expect to have gross receipts in 2021 and may compare them to the same quarter in 2020 are allowed to do so.
Were the full-time equivalent employees (FTEs) on an average monthly basis in 2019 larger than 100 or 500?
The ERC in 2020 will have more stringent limits for companies that had more than 100 full-time employees in 2019, and the ERC in 2021 will have restrictions that are equivalent for companies that had more than 500 full-time employees in 2019. In particular, the ERC’s jurisdiction over these companies is confined to cases in which employees were paid while not really executing the services for which they were compensated, or in which health insurance premiums were paid for employees who did not otherwise get wages (i.e., furloughed employees).
Therefore, the headcount of full-time employees has an effect on the credit that will be available in 2020 and 2021, but this effect is completely determined by the employment data from the 2019 measuring period. In some cases, determining whether or not the “100 full-time” or “500 full-time” employee count criterion has been exceeded may be made more difficult by the fact that the business entity in question is tied to other businesses, all of which may, when combined, surpass the aforementioned criteria. In circumstances in which there were seasonal employees or considerable variations in headcount throughout 2019, the actual determination of full-time employees may also be made more difficult by these factors.
Which payroll expenses were covered by the profits of the PPP loan, and to what degree did those proceeds get forgiven or were they anticipated to get forgiven?
The revisions that the CAA made to the ERC were made to prevent “double dipping,” often known as the practice of claiming a credit in a situation where the payroll expenses were paid for with the revenues from a forgiven loan. In order to determine the fraction of ERC-qualifying payroll expenditures that were not covered with such profits, a thorough investigation into the use of forgiven (or expected-to-be-forgiven) PPP loan funds is required. This investigation must be conducted in order to track the usage of such proceeds.
Other areas that provide an increased level of complexity and in which companies could benefit from support include the following:
- Conducting an investigation into the effects of buying or selling a business within the credit qualifying period and analyzing the results (or the 2019 comparative period)
- The coordination of an ERC calculation and claim with other federal benefits, such as the paid leave provided by the Families First Coronavirus Response Act (FFCRA);
- Modifying payroll tax filings (Form 941) for applicable quarters in order to make a claim for the ERC
Credit for Keeping an Employee on Board (2021)
The Consolidated Appropriations Act, which was enacted in December 2020, broadened the application of the Employee Retention Credit and made it possible for qualified taxpayers to claim the ERC in 2021, regardless of whether a credit was claimed in 2020. This provision was added to the ERC. Although this is an expansion of the program that was started in 2020, there are certain additional rules that apply to the year 2021 specifically. The purpose of this flowchart is to aid in determining when the ERC may be accessible; however, it is not intended to serve as a replacement for thorough study and calculation.
On R&D tax credits, the impacts of the PPP and employee retention credit have been clarified according to a new law.
The most recent COVID-19 relief from the federal government enables businesses to deduct expenses that were paid for the PPP loan funds. Additionally, it prohibits “double-dipping” for wages claimed in 2021 in order to qualify for the employee retention credit. The qualifying payroll for research and development tax credits is impacted in the following ways by these provisions:
The Consolidated Appropriations Act (CAA), a package that provides over $900 billion in assistance aimed to help businesses and individuals harmed by the economic implications of the COVID-19 outbreak, has been signed into law by President Trump. Businesses who have taken out Paycheck Protection Program (PPP) loans, particularly those that claim the research and development (R&D) tax credit, will be pleased to learn that one of the most important provisions of this new law contains major positive news. Another provision includes a number of essential exceptions for businesses that plan to claim use of the employee retention credit (ERC) in conjunction with a research and development tax credit.
The first stance taken by the IRS with regard to tax deductions
Businesses that have taken out PPP loans may be eligible for the debt to be automatically forgiven provided they satisfy the standards set out for the program. The Internal Revenue Service (IRS) informed taxpayers during the spring of 2016 that expenses paid using PPP loans that were subsequently forgiven would not be deemed deductible for purposes of income tax. Employers were left uncertain as to whether or not the costs of payroll that was covered by PPP expenses would be deductible at the end of the year as a result of this situation. Additionally, it provided an additional layer of complication for businesses that calculate their R&D tax credits by including in payroll costs that are due to research and calculation operations. The Internal Revenue Service (IRS) noted at the time that action from Congress would be necessary in order to make these expenses deductible.
The deductibility of expenses paid by PPPs is explained by Congress.
That measure taken by Congress was a result of the CAA’s efforts. The new law provides a clarification of the treatment of business expenses by businesses who obtained PPP loans that were subsequently forgiven. These companies have been offered the option to have their forgiven PPP loans repaid to them. It makes it abundantly clear that the intention of the legislation from the beginning was to make it possible for such expenses to be eligible for a deduction. This not only paves the way for businesses to deduct the payroll taxes and other related expenses that were paid using PPP proceeds, but it also frees up the use of those expenses so that they can be used in the calculation of the payroll-based components of R&D expenses that are eligible for that valuable tax credit. PPP proceeds were used to pay payroll taxes and other related expenses. After several months of ambiguity over the utilization of payroll expenses in the computation of credits at businesses that took out PPP loans, the CAA has, in a nutshell, basically restored us to a “business-as-usual” footing for calculating R&D tax credits.
For the sake of calculating research and development tax credits, the CAA has, in a nutshell, put us back on a “business as usual” footing.
R&D tax credits as well as the employee retention credit
The news on the ERC front isn’t quite as positive for employers that also claim R&D tax credits; nevertheless, any issues should be controllable with some tweaks to the tracking of wages that are assigned to R&D work. With the R&D tax credit calculation, the following are the two most important points to keep in mind regarding the COVID-19 relief bill:
- Beginning in the year 2020, the ERC could only be received on wages paid to employees who were not performing services at businesses that employed more than 500 persons. They were unable to be involved in “qualified research activities” since they were not providing any services. If your R&D expense tracking system treats the hours of some research personnel as “qualified research activities” by default, you will need to review their time to ensure that wages paid during a period in which they were not performing services are removed from the R&D tax credit calculation. If this is the case, you will need to make sure that your R&D expense tracking system is set up correctly.
- Beginning in the year 2021, the updated rules of the ERC will expressly prohibit any wages that were utilized to determine the ERC from being considered eligible for the purposes of the R&D tax credit. Employers that want to claim both credits have the responsibility of claiming that there is no overlap between the wages that are used to calculate the ERC and the wages that are used to calculate the R&D tax credit.
R&D tax credits and preparing for the end of the year
Any PPP relief sought throughout the year shouldn’t alter the process of calculating the credit for this year, according to the new law, which could provide some piece of mind to business owners whose companies have historically depended on R&D tax credits. It is possible that the amount of detail necessary in your paperwork for wages attributable to qualifying research activities has just become a little bit more difficult. This is the case if you plan to claim both the employee retention credit and the R&D tax credit in 2020 and/or 2021.
As has always been the case, the R&D tax credit calculation is extremely dependant on the particular set of facts and circumstances that pertain to each taxpayer. If you have any queries regarding the calculation of this year’s credit or the possible eligibility of your company for this excellent tax incentive, please do not hesitate to get in touch with your Plante Moran adviser.