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Employee Retention Credit Updates, Expanded Eligibility

AAFCPAs would like to make clients aware that the Employee Retention Credit (ERC), which was introduced by the CARES Act back in the Spring, has now been extended and amended as part of the Consolidated Appropriations Act, 2021.

(Details related to the 2020 credit are outlined in a previous blog: Payroll Tax Credits and Other COVID-19 Payroll-Related Benefits.)

Changes Applicable to 2020 & 2021 Versions of The Credit

The Consolidated Appropriations Act, 2021 made three modifications to the ERC which are retroactive to the effective date of the CARES Act:

  1. Paycheck Protection Program (PPP) borrowers are eligible to obtain this credit, so long as they qualify otherwise. You cannot use the same costs for the PPP forgiveness application that are used for the ERC. (Reference the Impact on Other Benefits below for more information. Contact your AAFCPAs Partner to understand how to maximize the benefits of both programs.)
  2. Gross receipts of a tax-exempt entity include all amounts treated as gross receipts under Section 6033 of the Tax Code.
  3. Group health plan expenses not included in gross income of an employee may be allocated and included in qualified wages.

For the 2021 version of the Credit, which is covered under Title II Section 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the below rules apply:

Who is eligible for the credit?

The credit is available to all employers regardless of size, including tax-exempt organizations. Qualifying employers must fall into one of two categories:

  1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter. Eligible wages are only those wages paid during the full or partial shutdown, subject to the calculation below.
  2. The employer’s gross receipts (FOR PROFITS: as defined under Section 448(c) of the Internal Revenue Code, NONPROFITS: as defined under Section 6033 of the Internal Revenue Code) are below 80% of the comparable quarter in 2019. In other words, an organization who experienced a 20% or more decline in gross receipts will qualify for this credit. There are special rules on how to calculate your gross receipts, especially if you were not in existence in 2019 or if you would like to base your gross receipts on a prior calendar quarter. Eligible wages are the wages paid in the quarter of the gross receipts drop, subject to the calculation below. Note: Economic Injury Disaster Loan (EIDL) and PPP loan funds are specifically excluded from gross receipts.

Additionally, Effective January 1, 2021, an exception will allow the credit for state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (which includes organizations such as Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions).

Value of the Credit

The amount of the credit for 2021 is now 70% of qualifying wages paid up to $10,000 per quarter. This is another change for 2021 as compared to the credit value for 2020. This would be on wages paid from January 1, 2021 to June 30, 2021.

During the first two quarters of 2021, a maximum of $10,000 in qualified wages for each employee per calendar quarter may be counted in determining the 70% credit. Therefore, the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee per calendar quarter, or a total of $14,000 per employee.

The credit value also changes depending on the size of your organization:

  • For employers with more than 500 employees, this credit is for wages paid to employees that provided no services during the shut-down.
  • For employers with 500 or less employees, all wages qualify for the credit without regard to whether the employee worked, or the employer was in operation.

Note: this is a change from the 2020 version, which was based on organizations either over or under 100 employees.

The original credit as defined in the CARES Act disallowed the credit for any increase in pay rates. This disallowance of the credit for pay rate increases is repealed, now allowing the credit for hazardous duty pay increases, among others.

Impact on other Benefits/Credits

The benefit may not be used for wages already receiving benefit under Paid/Sick Family Leave Credit or the Deferral of Employer Social Security Tax.

The Act provides that eligible entities should not double dip on the benefits, meaning the qualified wages considered in determining the ERC should not be counted as payroll costs under the PPP. Employers may elect not to have wages count as qualified wages for the purposes of ERC, which you would do if you need to include those wages in your PPP forgiveness application. If a PPP loan is ultimately NOT forgiven, the election is reversible and you may then count the wages as qualified for the purposes of the ERC. Essentially, this allows employers who received PPP to decide what is most advantageous to their organization to allow for maximum Federal aid.

How to Apply

AAFCPAs is pleased to report that the application process has not changed from 2020. However, there are rules related to organizations who may have already filed their 2020 Forms 941 and, because they had the PPP, they ignored the 2020 version of this credit. Those organizations who are now eligible may take those credits on their final Form 941, or may amend their previous Form 941s

Employers will be reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Advance payments to small employers are permitted by the Act, and AAFCPAs expects guidance on the specifics of applying for those. This Act allows small employers (under 500 employees) to receive an advance of the credit by basing their drop in gross receipts on the immediately preceding quarter. In other words, an employer may qualify for the Q1 2021 credit by comparing their Q4 2020 gross receipts to their Q4 2019 gross receipts and verifying a 20% or more reduction. The employer will then “true up” their true credit amount at the end of Q1 2021.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Please discuss with your payroll provider with regards to specific procedures.

AAFCPAs’ COVID-19 Task Force will continue to provide guidance and valuable insights as more information becomes available about ERCs and other financial relief programs. If you have any questions, please contact Brittany Besler, MBA, CPA, Esq. at 774.512.9001, bbesler@nullaafcpa.comCarla McCall, CPA, CGMA, at 774.512.4049, cmccall@nullaafcpa.com; or your AAFCPAs Partner.

 

About the Authors

Brittany Besler
Brittany possesses a unique combination of tax, legal, and business backgrounds, and is a valuable member of AAFCPAs’ Tax practice. She provides tax planning, research, and compliance solutions for corporations, partnerships, nonprofits, individuals, estates & trusts. Brittany advises businesses and individuals on various federal, state, local and foreign tax-related issues, including counseling clients on the consequences of new and updated tax laws. She assists clients in the creation of appropriate and optimal organizational structures, and advises on tax planning and tax exemption compliance. She advises newly-formed and well-established nonprofit clients on meeting compliance requirements of various government agencies, including the IRS rules on fundraising and political activities.
Carla McCall
Carla is Managing Partner of AAFCPAs, a 240 person CPA and consulting firm with offices in Boston, Westborough, and Wellesley, MA. She specializes in providing assurance, tax, and business consulting solutions for sophisticated nonprofit organizations, including: multi-service human & social services providers, behavioral health providers, arts & cultural organizations, foundations and grant making institutions.