The Consolidated Appropriations Act, 2021 Extends and Expands Eligibility for Employee Retention Tax Credit

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TAKEAWAYS

  • The Consolidated Appropriations Act, 2021 extends eligibility for the employee retention tax credit through June 30, 2021, and increases the potential amount of the credit during this period.
  • The Act increases the threshold for the number of employees an eligible employer may have from 100 to 500 for claiming the credit during the first two quarters of 2021 with respect to qualified wages paid to employees who are currently working.
  • Employers that received a Paycheck Protection Program loan may now be eligible to qualify for the employee retention tax credit, but may not claim the credit with respect to any wages that are paid with a PPP loan that has been forgiven.

The Consolidated Appropriations Act, 2021 (the Act), signed into law in December 2020, extends and expands the employee retention tax credit originally enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

CARES Act Provisions

The CARES Act permitted certain employers that are subject to a full or partial closure order due to COVID-19, or that experience a significant decline in gross receipts, to take a tax credit for certain wages paid to its employees. The credit is equal to 50 percent of qualified wages paid to employees after March 12, 2020, and before January 1, 2021, up to $10,000 in wages for each employee for all calendar quarters during this period. The maximum credit for eligible wages paid to any employee during this period was $5,000.

Qualified wages eligible for the credit under the CARES Act vary based on the average number of full-time employees employed by the employer during 2019. If the employer averaged more than 100 full-time employees in 2019, qualified wages includes only wages paid to an employee for time that the employee is not providing services due to either the full or partial closure order or the significant decline in gross receipts. If the employer averaged 100 or fewer full-time employees during 2019, qualified wages include wages paid to any employee during the period of economic hardship (regardless of whether they are working). Qualified wages include the employer’s qualified health plan expenses that are properly allocable to the wages.

The employee retention tax credit is fully refundable. Eligible employers may claim the credit under the same procedures for claiming the qualifying COVID-19 sick and family leave tax credits under the Families First Coronavirus Response Act, including by withholding from payroll tax deposits, claiming credits on quarterly employment tax returns (e.g., Form 941) and filing Form 7200 to claim credits if payroll tax deposits are less than eligible credits. See Pillsbury’s’ alert here related to filing Form 7200.

Extension, Expansion and Changes to Employee Retention Tax Credit

The Act extends the employee retention tax credit for calendar quarters through June 30, 2021 and expands eligibility and the potential amount of the credit qualifying employers may take during the first and second quarters of 2021. Most notably, the Act eliminates the prohibition under the CARES Act on employers that received a loan under the Paycheck Protection Program (including any entities under common ownership) from taking the credit if they otherwise satisfy the eligibility requirements, which could significantly increase the number of employers eligible for the credit. This change is retroactive to March 12, 2020. The following is an overview of the key changes to the employee retention tax credit implemented by the Act.

Click here to view the overview.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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