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Biden Relief Package: Employee Retention Credits

As you may know, President Biden signed the $1.9 trillion American Rescue Plan (ARPA) into law on Thursday, March 11th. AAFCPAs has outlined, below, the adjustments to the employee retention credit (ERC). The amendments to the ERC made by the ARPA are effective for calendar quarters after June 30, 2021.

What You Need to Know:

  • The ARPA extended the ERC through the end of 2021. Previously, the ERC was set to expire on July 1, 2021. The ARPA extends the credit through Q3 & Q4 of 2021, increasing the maximum value of the credit per employee in 2021 to $28,000 (i.e., $7,000 credit on the first $10,000 of wages paid per employee, per quarter).
  • Under the ARPA, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.
  • The ARPA also extends the statute of limitations from three to five years for the IRS to assess amounts attributable to the ERC. The statute of limitations begins to toll on the later of the filing date of the original return that includes the calendar quarter with respect to which the credit is determined, or April 15 of the succeeding calendar year.
  • The ARPA increases the availability and value of credit to those employers who are “severely financially distressed,” i.e., those who experienced a severe decline in gross receipts. If an employer meets this definition, it may treat all wages paid to employees as qualified wages, regardless of the number of full-time employees.
  • The ARPA also expands credit availability to employers who qualify as a “recovery startup business,” i.e., those employers who began a trade or business after Feb. 15, 2020, and whose gross receipts average less than $1 million.

New Guidance From the IRS on ERC

The IRS recently released much needed clarity and authoritative guidance on the 2020 version of the ERC through Notice 2021-20. The ERC credit was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L 116-260. The notice clarifies and describes retroactive changes under the new law that apply to 2020, primarily relating to expanded eligibility for the credit for taxpayers who took Paycheck Protection Program (PPP) loans.

AAFCPAs has outlined for your convenience the major clarifications within the notice:

Taxability of the Employee Retention Credit

FAQs 60 & 61 make the IRS’ position clear on the “taxability” of the ERC. While the credit itself is not considered taxable income, there is an underlying tax effect since it is a reduction in an expense. The ERC is not includible in gross income, but it is subject to expense disallowance rules, which effectively make it taxable.

For example, if an employer received $100,000 in ERCs, it would be required to reduce its deductible wage expenses, including qualified health plan expenses, by $100,000, thus subjecting it to tax on an extra $100,000 of income (or causing less of a loss if it was in a net loss position). The expense reduction rules apply to the wages, including qualified health plan expenses, paid or incurred in 2020 and which were reimbursed by the ERC. There is no reduction in the employer’s deduction for its share of Social Security and Medicare taxes by any portion of the ERC.

How much of your business must be suspended to be considered partially suspended operations?

Initially, the CARES Act stated that a business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order. Under this Notice 2021-20, the IRS clarified their definition of nominal.

A portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).

In addition, the ability to telework may mean that your organization was not partially shut down. Even if organizations had not teleworked in the past, the IRS gives only a two -week grace period to organizations who needed to adapt to the teleworking environment. Therefore, your organization may have been considered partially suspended if your organization incurred a significant delay (for example longer than a two-week period) adapting to this environment. This small period may mean your credit is limited.

How Do We Count FTEs?

The term “full-time employee” means an employee 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 (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code. An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.

How Do We Coordinate With the PPP?

Many organizations ignored the ERC in 2020, because until Dec 27th of 2020 any organization with a PPP loan could not take advantage of the ERC. The December 2020 legislation made organizations eligible for the ERC but, unfortunately, gave very little guidance on how to practically account for and take advantage of both programs.

Notice 2021-20 provides specific examples of organizations utilizing both PPP and ERC.

  • Unfortunately, those who already applied for forgiveness may lose the ability to use some of those wages for the ERC, such as those who applied with payroll only. If you find yourself in this circumstance, you may not go back and consider any of your non-payroll costs in order to free up those wages for ERC.
  • In cases where an organization included non-payroll costs on their forgiveness application, even if payroll alone covered their loan, it will be assumed that 60% of forgiveness was payroll and 40% was non-payroll, therefore you would have additional payroll to use on ERC.

If I deferred social security tax under Section 2302 of the CARES Act, what is the impact on my ability to claim the ERC?

As a reminder, Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer’s share of social security tax. Notice 2021-20 confirms that Section 2302 does not impact an employer’s eligibility to claim the employee retention credit. However, because an employer may defer deposits under section 2302 before reducing deposits in anticipation of claiming the credit, the deferral may affect the amount that an employer may request as an advance of the credit.

Further Notice 2021-20 explains:

  1. who are eligible employers;
  2. what constitutes full or partial suspension of trade or business operations;
  3. what are the aggregation rules applicable to the credit and what do they mean;
  4. what is a significant decline in gross receipts;
  5. what is the maximum amount of an eligible employer’s employee retention credit;
  6. qualified wages;
  7. qualified health plan expenses;
  8. how an eligible employer claims the employee retention credit; and
  9. how an eligible employer substantiates the claim for the credit.

The ERC continues to evolve, and it is critical to follow the ongoing legislation and determine how it pertains to your business. This may seem daunting. We encourage clients to contact your AAFCPA Partner today to leverage this evaluation so you may get back to focusing on your business operations. AAFCPAs’ COVID-19 Task Force is dedicated to: following emerging legislation and FAQs, understanding how this impacts our clients, and educating our 240+ person team on opportunities for proactive outreach.

If you have questions, please contact Brittany Besler, MBA, CPA, Esq. at 774.512.9001, bbesler@nullaafcpa.com; or your AAFCPAs Partner.

About the Author

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.