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.
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.
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:
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.
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