President Biden signed the American Rescue Plan Act of 2021 (“ARPA”) on Thursday, March 11th which generally extends – through the end of 2021 – the Employee Retention Credit (“ERC”) provisions from the Consolidated Appropriations Act of 2021, which was passed in December 2020. The ERC was originally enacted under the CARES Act in March 2020 to encourage employers to retain employees during the pandemic.
For 2021, the ERC is a refundable tax credit against certain employment taxes equal to 70 percent of the qualified wages an eligible employer pays to employees from January 1, 2021 to December 31, 2021. The maximum credit for 2021 is 70 percent of qualified wages up to $10,000, or $7,000 of credit per employee per quarter. This equates to $28,000 of credit per employee in 2021.
The first step to claiming the ERC is to determine eligibility. To qualify as an eligible employer for a calendar quarter in 2021, a business must show that either its operations were fully or partially suspended during the quarter due to an appropriate governmental order or that its gross receipts were less than 80% of its gross receipts for the same calendar quarter in 2019. Note, there is also a set of rules that must be taken into account that aggregates multiple employers if there is common ownership.
The ARPA also expands eligibility to include two new types of businesses. A recovery startup business is a business that started operations after February 15, 2020, and had annual gross receipts of less than $1M. The maximum ERC for a recovery startup business for any calendar quarter shall not exceed $50,000. A severely financially distressed employer is a business that experienced a gross receipts reduction of more than 90% compared to the same calendar quarter in 2019. These businesses will be able to treat all wages up to the $10,000 limitation as qualified wages, even if the business is a large employer.
The ARPA did not change the definition of qualified wages, nor did it change the employee count required to be a large employer. For 2021, if an eligible employer had more than 500 full-time employees in 2019, the credit is based on amounts paid to employees for not providing services. If the number of full-time employees in 2019 was less than 500, the credit is based on wages paid to all employees. In determining if wages paid are qualified wages for the ERC, an eligible employer cannot include wages used to obtain PPP loan forgiveness, amounts used to claim the sick and family leave credit, or the newly created restaurant revitalization fund.
The ARPA also contains a provision to extend the normal three-year statute of limitations to five years during which the IRS can audit and issue assessments related to the ERC.
GBQ continues to monitor ERC developments. If you have questions, please contact your GBQ advisor and see the ERC section of our COVID-19 webpage.
Article written by:
Lorani Orobitg, CPA
Manager, Tax & Business Advisory Services
Tax Advisory Services