Under the CARES Act, as enacted by Congress in March of 2020, certain businesses were eligible to claim a new fully-refundable credit called the Employee Retention Credit (“ERC”). The CARES Act provided important limitations and computational rules in determining the ERC which was set to expire on December 31, 2020. Importantly, the ERC was not available to any employer who received PPP money (or any member of an affiliated group that included a member receiving PPP money).
The Consolidated Appropriations Act of 2021, signed into law by President Trump in the final week of 2020 amended the ERC. First and foremost, the ERC is now available even to those employers (or members of affiliated groups) who received PPP money. Beyond this, the new law expanded the ERC into the first two calendar quarters of 2021, and made important changes that should result in more available credit for employers.
A) Businesses that have been affected by a governmental shutdown or have seen their YOY gross receipts drop by 50% that have 2020 payroll costs including any business that received PPP money.
A) In 2020, the credit is based on 50% of qualified wages, with the maximum credit effectively being $5,000 per employee for the year.
|Qualifying in 2020||
This taxpayer would begin qualifying in Q2 and would lose qualification at the END of Q4.
|Qualifying in 2021||
Elective Treatment: Either
In 2021, this taxpayer could elect to apply the quarter-on-quarter method, testing the immediately preceding quarter (Q4 of 2020) against the same quarter for 2019 and if less than 80%, test is met.
|Qualified Wages (as limited)||
The definition of QUALIFIED WAGES changes depending on how many full time equivalents (FTEs) – as determined under Code § 4980H (i.e., average of 30 hours per week or 130 hours per month).
For 2020 ….
If more than 100 FTEs, qualified wages only include wages paid to employees not to provide services during an eligible quarter (or portion thereof) were qualified wages.
In 2020, qualified wages were further capped to what an employee would have been paid for the preceding 30 days. This rule was designed to prevent an employer from bonusing out money to an employee in order to cause the employee to hit the $10,000 cap.
For 2021 ….
If more than 500 FTEs, qualified wages only include wages paid to employees not to provide services during an eligible quarter (or portion thereof) are qualified wages. Moreover, the rule designed to prevent bonusing amounts during affected quarters in order to maximize the $10,000 per quarter cap has been removed.
|Qualified Wages (overall)||
In 2020, qualified wages are capped at $10,000 per employee for ALL calendar quarters (i.e., looking at all the qualifying quarters – either due to a shut down order or the gross receipts test – the most amount of wages paid to any one employee is $10,000, whether paid all in one quarter or spread throughout all the qualifying quarters).
In 2021, qualified wages are capped at $10,000 per employee for ANY calendar quarter (i.e., in theory, if a business qualifies in both Q1 and Q2 of 2021, the maximum wages it could claim would be $20,000 to any one employee but it would have to pay $10,000 in each quarter).
|Claiming the 2021 Credit in Advance||
Unlike the 2020 ERC, the 2021 ERC may be claimed in advance if the taxpayer had less than 500 FTEs in 2019.
Gross Receipts include sales net of returns and allowances and all amounts received for services. In addition, administrative guidance specifically provides that gross receipts include interest, original issue discount, tax-exempt interest, dividends, rents, royalties, and annuities, regardless of whether those amounts are derived in the ordinary course of business. For capital asset transactions, gross receipts include proceeds less the adjusted basis in the property. Temp. Reg. § 1.448-1T(f)(2). Other items may be included in gross receipts. For example, gross receipts may include other types of tax-exempt income such as insurance proceeds. Gross receipts of an affiliated group are treated as those of a single employer for purposes of the ERC (pursuant to the IRS’s May FAQs).
If entities are treated as a single employer under Code §§ 52 or 414, then they are aggregated for purposes of the ERC. The rules of these code sections are very complex and require a detailed analysis of particular facts, but in very general terms, parent-subsidiary groups, brother-sister groups, combined ownership groups, and affiliated service groups are aggregated. Once aggregated, the ERC is allocated based on a proportionate share of qualified wages by each member of the affiliated group.
|Shut Down Orders||
Order from an appropriate governmental authority limiting commerce, travel, or group meetings. While this has been the topic of much debate, the IRS issued FAQs in May that provided some guide posts.
On the other hand, the following will not be deemed eligible for ERC purposes:
|Claiming the ERC||
Previously, the IRS has stated that in the event an employer determines in 2021 that a significant decline in gross receipts occurred during 2020, it may claim the employee retention credit on qualified wages paid during 2020. Generally, the employer would claim the credit by filing a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Notwithstanding this, the recent legislation provides a mechanism by which a taxpayer could claim the 2020 credit (e.g., in the case of a business who previously received PPP money) against its 4th quarter Form 941 due on January 31, 2021.
A PEO will report the credits for the employer on an aggregate Form 941 and separately report the credits allocable to the employer on an accompanying Schedule R. The PEO does not have to complete Schedule R with regard to employers for which it is not claiming a credit. The employer will need to provide a copy of any filed Form 7200 to the PEO so it can properly report the credit on the Form 941.
Step 1: Determine whether the business has any qualifying quarters either because of a shutdown or decline in gross receipts. Remember that for 2020, it is comparable quarter for 2019. For 2021, it is either the current quarter against the comparable quarter for 2019, or at the election of the business, the immediate preceding quarter (e.g., Q4 of 2020) versus the comparable 2019 quarter.
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