At this point, it’s hard to keep track of the ever-evolving provisions of federal pandemic relief legislation. Luckily, the changes to these programs often entail expansions and extensions which give businesses more time (and opportunities) to take advantage. Today we examine the Employee Retention Credit (ERC), which has been extended through the end of 2021. If you haven’t needed or chosen to take advantage of the ERC, it could be worth another look.
Extended Expiration Date and Expanded Eligibility
The extension of the ERC was contained in the American Rescue Plan Act (ARPA), which became effective in March 2021. In addition to extending the expiration date, the ARPA also expanded the eligibility criteria for claiming the credit.
Originally, the ERC was available to businesses that met one of two conditions: 1) Their operations were partially or fully suspended due to a COVID-19-related government shutdown order, or 2) their gross receipts fell by more than 50 percent compared to the same quarter of the prior year.
The ARPA added new qualification criteria by designating recovery startup businesses as eligible for the credit. These are businesses that began operations after February 15, 2020 and have average annual gross receipts of $1 million or less. Note that the amount of the credit for recovery startup businesses is limited to $50,000 per calendar quarter and is applicable for only the third and fourth quarters of 2021.
More ERC Changes
The amount of the ERC was originally 50 percent of qualified wages up to $10,000 annually per eligible employee. This was increased to 70 percent of qualified wages paid between January 1, 2020 and June 30, 2020 by the Consolidated Appropriations Act (CAA), which was enacted at the end of 2020.
The CAA also raised the per-employee limit from $10,000 annually to $10,000 per quarter, which effectively raised the maximum credit to $7,000 per quarter, or $28,000 per year, for each eligible employee. In addition, the CAA lowered the gross receipt reduction criteria from 50 percent to 20 percent, which made more businesses eligible for the credit. Businesses can compare gross receipts to the same quarter in 2020 or 2019 in order to determine qualification.
The CAA also eliminated the original CARES Act provision that barred Paycheck Protection Program (PPP) borrowers from claiming the ERC. These businesses now qualify for the credit for qualified wages that aren’t paid using forgiven PPP funds.
More ARPA Changes
The ARPA added some changes to the ERC that apply only to the third and fourth quarter of 2021. One of these is the application of the credit against the employer’s share of Medicare taxes instead of Social Security taxes. Excess credits will continue to be refundable during this time.
In addition, the ARPA adds a new category of businesses that qualify for extra financial relief. Dubbed “severely financially distressed employers,” these are businesses with less than 10 percent of gross receipts in 2021 compared to the same period in 2019. Such businesses can count any wages paid to an employee during any calendar quarter as qualified wages for purposes of the ERC, regardless of the business’s size.
The ARPA also extends the statute of limitations for the IRS to evaluate ERC claims from the usual three years to five years from the date the original tax return (for the calendar quarter used for the credit calculation) is filed.
Additional IRS Guidance
In March, the IRS issued additional ERC guidance to help businesses determine if their operations had been partially suspended due to a COVID-19-related government shutdown order. Originally, the IRS had stated that “more than a nominal portion” of operations had to be suspended for a business to qualify for the credit.
IRS Notice 2021-20 offers more detailed criteria for making this determination. It specifies that the criteria are met when:
- Gross receipts from the suspended operation are 10 percent or more of total gross receipts.
- The hours of service performed by employees in the suspended operations are 10 percent or more of the total hours of service.
- Modifications to operations result in a 10 percent or greater reduction in the business’s ability to provide goods or services.
Even at this point of the pandemic, proper utilization of the ERC can be an invaluable tool for businesses still dealing with disruptions or lingering financial difficulties. Rather than wade into this complicated tax credit yourself, it’s best to work with an experienced tax advisor who can determine if and how the ERC makes sense for your business.
Don’t make big decisions about utilizing or forgoing pandemic relief programs until you talk to the experts. Dembo Jones has been assisting businesses throughout the pandemic in protecting assets, minimizing tax exposure, and ensuring business continuity (which can include taking advantage of tax provisions like the ERC). Contact us today for a consultation.