Additional COVID-19 Tax Relief: Extended and Modified Employee Retention Tax Credit Favors Businesses
The Employee Retention Tax Credit (ERTC) aimed to encourage employers to retain their workforces as the pandemic captured headlines and shutdowns swept the country. Enacted on March 27, 2020, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERTC provides eligible employers a refundable tax credit on qualified wages. Additional relief was subsequently provided by the Consolidated Appropriations Act of 2021 (CAA), signed into law in December 2020.
One impactful element included in the CAA was the extension of the employee retention tax credit (ERTC) through June 30, 2021. The extended ERTC has been significantly modified in a manner favorable for businesses.
What are the eligibility requirements for the ERTC?
The employer will be eligible to qualify for the ERTC under one of two tests:
- Governmental order rule, or
- Significant reduction in gross receipts.
A governmental order rule exists when business operations were fully or partially suspended by government mandate due to COVID-19 during the quarter the order is effective.
Under the CARES Act, for wages paid during the period March 12, 2020, through December 31, 2020, the ERTC gross receipts test is met when revenue was down in a 2020 quarter from a comparable quarter in 2019.
The CAA significantly reduced the gross receipts test from a 50 percent threshold to a 20 percent threshold for wages paid from January 1, 2021, through June 30, 2021. The reduction in gross receipts for this period is as follows:
- There is a decline of more than 20% in gross receipts when comparing a quarter in 2021 to a comparable quarter in 2019 (e.g., first quarter). The employer can elect to satisfy the gross receipts test by comparing the preceding quarter to the similar quarter in 2019 (e.g., for the first quarter 2021, compare the fourth quarter of 2020 to the fourth quarter of 2019).
Tax-exempt organizations may also qualify for the credit subject to the eligibility requirements.
What is the maximum credit available?
The ERTC is a 50 percent tax credit on qualified wages up to $10,000 per employee for 2020. Therefore, the maximum credit received per eligible employee in 2020 is $5,000. Qualified wages include the cost of health insurance provided to the eligible employee.
Under the CAA, the ERTC credit has been increased from 50 percent to 70 percent. In addition, the credit is allowed per employee per quarter. This could result in a total $14,000 credit for the first two quarters of 2021 per employee if all eligibility requirements are met. The ERTC is allowed against the employer’s share of social security taxes, and the remaining amount is fully refundable. It should be noted that the credit received reduces the amount of the tax deduction allowed for the related wages; as such, the credit will be income in the year received.
What counts as qualified wages?
The amount of qualified wages depends on the number of employees employed by the business. In 2020, if the employer had 100 or fewer employees, wages would qualify for the credit if they were paid to employees whether or not they were providing services. If the employer had more than 100 employees, qualified wages were only those paid to employees who were not providing services. The employee count is based on full-time employees and full-time equivalent employees in the 2019 tax year.
Under the CAA, the ERTC was modified to increase the 100-employee limit to 500 employees. Therefore, if the employer had 500 or fewer full-time employees in 2019, it can use wages paid to employees regardless of whether the employees provided services from January 1, 2021, through June 30, 2021. This increase will allow many more businesses to qualify for the ERTC in 2021.
What is the Affiliations Rule?
In general, the affiliation rules relate to controlled groups of corporations, commonly controlled businesses, and affiliated service groups. If the employer falls under the Affiliations Rule, all affiliated entities are treated as a single employer for purposes of counting the number of employees, determining if there has been a significant reduction in gross receipts, and whether there has been a full or partial suspension of business under a government order.
What forms do employers file to receive the ERTC?
The employer generally will report the credit on Form 941, Employer’s Quarterly Federal Tax Return. For a calendar year business, the first quarter 2021 Form 941 is due on April 30. The employer may qualify for an advance payment of the credit; however, additional guidance on permitting the advance payment is still forthcoming. The advance payment will be calculated on 70 percent of the average payroll for the same quarter in 2019. There will then be a true-up of the advance payment once the Form 941 is filed.
How does the ERTC affect the PPP?
Originally, businesses could not qualify for the ERTC if they received the first round of PPP loan proceeds. The CAA made a significant retroactive change to the ERTC by permitting both employers that received a first round of PPP loan proceeds and those that receive the second round of PPP loan proceeds to be eligible for the ERTC, so long as the same wages are not used for the ERTC and PPP. Due to this retroactive change, employers may be able to retroactively claim the ERTC on 2020 qualified wages.
The extended ERTC should allow more businesses to qualify for the credit. Employers should review eligibility requirements closely to determine if they qualify. Marcum professionals are available to assist with any planning needs or questions.
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