On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR Act) amended the employee retention credit (ERC) provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other changes, the ERC is now available from January 1, 2021 through June 30, 2021. Below is a description of the ERC available under the CARES Act and a list of the modifications now in place under the TCDTR Act.
ERC under the CARES Act
The ERC under the CARES Act allowed eligible employers a refundable credit against the employer portion of Social Security tax based on the amount of qualified wages paid to employees between March 13 and December 31, 2020. Eligible employers included those that were required to fully or partially suspend operations due the COVID-19 pandemic, or that had a significant decline in gross receipts. A significant decline included gross receipts that were less than 50% of the gross receipts for the same quarter in the prior year, until the gross receipts exceeded 80% of the gross receipts for the same quarter in the prior year.
“Qualified wages” included those paid to employees that are not providing services due to a drop in gross receipts or suspension of the business. For employers with 100 or fewer employees, all such wages are qualified, and for employers with 100 or more employees, qualified wages may not exceed the amount the employee would be paid for working an equivalent amount of time during the 30 days prior to the period of suspension of business or drop in gross receipts. Qualified wages also did not include paid COVID-19 sick leave and amounts employees are required to provide under the Families First Coronavirus Response Act. Qualified wages did, however, include qualified health plan expenses paid by the employer to maintain a group health plan and that are excluded from the employees’ gross income.
Under the CARES Act, the amount of the ERC was equal to the 50% of the qualified wages for each employee, with a limit of $10,000 in wages per employee. Additionally, governmental employers were not eligible for the ERC.
TCDTR Act Modifications
The TCDTR Act modified and expanded the ERC rules under the CARES Act. The following is a list of the modifications enacted by the TCDTR Act:
- Increases the ERC rate per employee from 50% to 70% of qualified wages;
- Expands eligibility by reducing the required year-over-year gross receipts decline from 50% to 20% of prior year receipts and creates a safe harbor permitting employers to use previous quarter gross receipts to determine eligibility;
- Increases the per-employee wage limitation from $10,000 for the year to $10,000 for each quarter;
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
- Allows certain public instrumentalities to claim the ERC, including colleges and universities, those whose principal business is medical/hospital care, and tax-exempt corporations organized as an instrumentality of the United States;
- Removes the 30-day wage limitation for larger employers, allowing employers to, for example, claim the ERC for essential employees’ bonus pay;
- Allows businesses with 500 or fewer employees to advance the ERC at any point during the quarter based on wages paid in the same quarter in a previous year;
- Allows employers who did not yet exist for all or part of 2019 to claim the credit based on the corresponding quarter in 2020; and
- Provides for a small business public awareness campaign regarding ERC availability to be conducted by the Secretary of the Treasury in coordination with the Administrator of the Small Business Administration.
Furthermore, retroactive to the effective date in Section 2301 of the CARES Act, the TCDTR Act clarifies that the determination of gross receipts for certain tax-exempt organizations includes all gross receipts, not just unrelated business gross receipts; clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance; and provides that employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds. Per the IRS, if an employer received a PPP loan and included wage payments for the second or third quarter of 2020 as costs on an application to obtain PPP loan forgiveness and the forgiveness as denied, employers can claim the ERC for those qualified wages on the fourth quarter of 2020 on Form 941. Since that time for filing such Form 941 has now passed, the IRS also states that employers may file an amended Form 941-X to take advantage of the ERC and obtain a refund.
The IRS plans to release more guidance on the TCDTR Act updates to the CARES Act, particularly in regards to measuring the decline in gross receipts using immediately prior quarters of 2020 and 2021. Additionally, we are still awaiting guidance with respect to the interaction between PPP loan forgiveness and the ERC. While the IRS has clarified that the ERC may be used for PPP loan amounts that are not forgiven, it has not clarified if this will apply to partially forgiven PPP loans or PPP loan forgiveness applications that have been rescinded by the employer. We also expect the IRS to update their FAQs to reflect the ERC changes. For more information on the ERC under the CARES Act, please see this M&S publication.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.