The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Act), which was passed into law on December 27, 2020, provides relief to taxpayers in the event of natural disasters. The bicameral law contains more cash for the COVID-19 stimulus program as well as further assistance for taxpayers whose lives have been disrupted by the COVID-19 epidemic (read our summary of the Act here). This essay will concentrate primarily on the Employee Retention Credit (ERC), as well as the key adjustments that were made to the credit, which include extending the credit period, increasing the credit amount in 2021, and expanding the ability for organizations to qualify. Because of these changes, it’s possible that some organizations who were previously ineligible to claim the credit in 2020 would now be able to qualify for it and request for refunds retrospectively.
Background
The Coronavirus Aid, Relief, and Economic Security Act was the legislation that led to the creation of the ERC, which is a refundable tax credit that may be applied for various employment taxes (CARES Act). The following is a list of various key modifications that were made to the ERC as a result of the Act:
- Organizations that have received a loan under the Paycheck Protection Program (PPP) are now qualified to submit a claim for the credit in the years 2020 and 2021, provided that they fulfill the requirements for the ERC. Only wages that are not factored into the computation for Public Service Loan Forgiveness are qualified for this credit. Under the previous law, beneficiaries of PPP loans were ineligible to make a claim for the credit.
The period limit for claiming the credit has been extended to include wages made before July 1, 2021.
- Beginning in 2021, the maximum refundable credit amount for each employee will rise from 50 percent to 70 percent of the employee’s qualifying wages. In addition, beginning in 2021, the maximum pay that would go toward qualifying for benefits will be increased from $10,000 per year to $10,000 each quarter for each employee.
The needed drop in gross revenues for credits in 2021 has been lowered from at least 50 percent to at least 20 percent as a result of this change.
- Beginning in 2021, the minimum criterion of 100 employees will grow to 500 employees.
- Employers working for federal, state, or municipal governments, as well as the agencies and instrumentalities of those levels of government, were ineligible for the credit under the CARES Act. For credits beginning in 2021, the Act expands eligibility to include public colleges and universities, organizations whose primary purpose or function is providing medical or hospital care, and organizations described in Internal Revenue Code (IRC) Section 501(c)(1) that are exempt from taxation under IRC 501. (a).
We have included an overview of the rules for each year below due to the fact that the credit computation and the organizations that are eligible to claim credits for the years 2020 and 2021 are distinct from one another.
An overview on the Methods Used to Determine Credit
Detailed Credit Calculation for the Year 2020 Credits
- Fifty percent of an employee’s eligible wages earned for the period beginning March 12, 2020 and ending December 31, 2020
- Qualified wages are capped at $10,000 per employee for the year 2020, which means the maximum credit that may be claimed for each employee is $5,000 annually:
The amount of qualifying health plan expenditures that an employee is responsible for paying is considered to be qualified wages.
Detailed Credit Calculation for the Year 2021 Credits
- Seventy percent of an employee’s wages that are considered to be qualified throughout the period beginning January 1, 2021 and ending July 1, 2021
- The maximum credit per employee is now $7,000 per quarter, despite the fact that qualified wages have increased to $10,000 per quarter;
The regulation that previously disallowed pay rate increases that met the criteria for creditable wages has been abolished.
Increments to risk premiums and costs associated with qualifying health plans are included in qualified wages.
An Overview of the Eligibility Requirements for Employers
Employer Who Is Eligible to Receive 2020 Credits
- Is engaged in a trade or business in the year 2020 and, with regard to any calendar quarter, the employer experienced one of the following:
During the quarter, operations are either completely or partially interrupted as a result of orders issued by governmental authorities restricting trade, travel, or group gatherings owing to COVID-19.
This particular quarter falls within the period frame of a “significant reduction in gross receipts”:
This period begins in the first calendar quarter after December 31, 2019, in which gross receipts are less than fifty percent of the gross receipts for the same quarter in 2019, and ends in the calendar quarter that follows the beginning quarter in which gross receipts are greater than eighty percent of the gross receipts for the same quarter in 2019.
Wages of qualifying employees that are entitled for a credit:
- Only qualifying wages given to employees who were not conducting services during the periods specified above are eligible for the credit if the average number of full-time employees for 2019 was larger than 100.
- Wages paid to all employees (other than owners) throughout the periods specified above are eligible for the credit, provided that the average number of full-time employees for 2019 was less than or equal to 100.
Employer Who Is Eligible to Receive Credits in 2021
In the end, the Act will have the same requirements as the credit for the year 2020; nevertheless, there will be substantial adjustments as follows:
- The needed fall in gross receipts has been lowered from a decline of higher than 50 percent to a decline of larger than 20 percent when compared to the same quarter in 2019:
During the calendar quarter that immediately before the current one, an election is open for use.
The threshold of 100 full-time employees that must be met in order to use all wages paid to employees, regardless of whether the employee is really performing services, has been increased to 500 employees. As a result:
- Only qualifying wages given to employees who did not execute services during the periods specified previously are eligible for the credit if the average number of full-time employees for 2019 was larger than 500.
Wages given to all employees (with the exception of owners) during the periods specified previously are eligible for the credit if the average number of full-time employees for 2019 was less than or equal to 500.
Additional Essential Factors to Consider
In accordance with the intent of Internal Revenue Code section 6033, the Act provides additional clarification on the definition of gross receipts for tax-exempt businesses. The phrase “gross revenues” has the same meaning when applied to employers other than tax-exempt organizations as it does when used to the context of Internal Revenue Code section 448. (c).
- The term “full-time employee” only refers to employees who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. This applies to both the 100-employee and the 500-employee thresholds. • The 100-employee threshold is more stringent than the 500-employee threshold. This is a significant differential for employers that are close to the level that applies to them and who have a number of employees working part-time.
- There is a possibility that businesses with 500 or less full-time employees will be qualified to receive an advance payment of the credit (limited to 70 percent of the average quarterly wages paid by the employer in calendar-year 2019).
- The specific facts and circumstances of each individual employer will be taken into consideration in making a determination as to whether or not an employer’s operations have been fully or partially suspended during a given quarter as a result of orders from a governmental authority limiting commerce, travel, or group meetings. On the website where commonly asked questions about the ERC are answered, the IRS has included numerous informative examples.
- For the purposes of the following ERC rules, some linked employers are needed to be aggregated and handled as a single employer in order to comply with the requirements. The rules for aggregation are difficult to understand and can have a substantial impact on whether or not an entity is eligible for the credit.
Determination of whether the employer had a trade or business that was completely or partially halted
A determination as to whether or not the employer experienced a “substantial drop in gross receipts.”
Determination of whether or not the employer has more than the required number of employees, either 100 or 500
- For the purposes of the federal income tax, an employer who receives an ERC for qualifying wages, including allocable qualified health plan expenditures, is exempt from the requirement that they include the credit as part of their gross income. As a result of the disallowance rule included in Internal Revenue Code section 280C, an employer’s wage deduction must be decreased by the amount of the credit (a).
- Now that PPP loan recipients may qualify for the ERC on qualified wages that are not used for loan forgiveness, it is important to evaluate the potential ERC benefit in comparison to a PPP 2 Loan and to take advantage of the ability to use up to 40 percent of qualifying nonpayroll costs for the purposes of the PPP loan forgiveness calculation.
You may get an overview of what organizations ought to know about the Employee Retention Credit for the years 2020 and 2021 by clicking here.
Conclusion
As a result of the amendments made to the ERC as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, new organizations now have the potential to be eligible for the credit. Organizations that in the past didn’t qualify because they had received PPP loans or weren’t qualified due of the percentage drop in gross receipts or number of employees should check these rules to see whether or not they are now eligible to participate.
BKD will keep an eye on this evolving scenario in the coming days. As is the case with the majority of issues concerning COVID-19, developments are occurring quite quickly. Take notice that the information shown here is accurate as of the day that the publication was made. For further information, please stop by the COVID-19 Resource Center at BKD.