On March 11, President Biden signed the American Rescue Plan Act of 2021, also known as the ARP Act. For businesses who have been and continue to be financially impacted by COVID-19, the provisions included within this act were intended to provide additional economic relief related to the ongoing pandemic.  Included within the ARP Act are extended and updated provisions to the Employee Retention Credit or ERC that will apply to quarters after June 30, 2021. 

Background: 

In order to qualify for the ERC under the CARES Act of 2020, businesses must have experienced fully or partially suspended operations as a result of a government order OR be an employer who had experienced a significant decline in gross receipts of at least 50% when compared to the prior year comparative quarter.  It is important to note, businesses that had to reduce business hours due to the government order will fall into the fully or partially suspended operations category and the credit will only apply to that portion of the quarter in which operations were reduced, not the entire quarter.  Under the decline in the gross receipts test, the wages paid for that entire quarter will qualify and continue until the first calendar quarter that follows the calendar quarter in which the employer’s gross receipts exceed 80% of the same 2019 quarter.  Wages paid (including health plan expenses) after March 12, 2020 and prior to January 1, 2021 qualify.  The refundable payroll tax credit is for 50% of qualified wages capped at $10,000 per employee for a maximum credit of $5,000 per employee annually for 2020.  Employers with 100 or fewer full time employees can include all employee wages paid during the period they qualify.  However, large employers with more than 100 full time employees are limited to wages paid to employees not performing services due. 

New Legislation for 2021:

The Employee Retention Credit was extended and expanded until June 30, 2021 through the Consolidated Appropriates Act, 2021.  Key changes to the provisions are outlined below.

• 20% significant decline in gross receipts (previously 50%) of any quarter in 2021 when compared to the same quarter of 2019 in order to determine eligibility.  An employer can elect to determine eligibility by comparing its gross receipts for the immediately preceding calendar quarter to the corresponding 2019 quarter (comparing Q4 of 2020 to Q4 of 2019 to determine eligibility for Q1 of 2021).
• Qualifying wages paid from January 1, 2021 through June 30, 2021.
• Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.  The maximum ERC amount available is $7,000 per employee per quarter for the first half of 2021. 
• For wages paid in 2021, a small employer is considered one that has 500 or fewer full time employees and is allowed to claim the ERC on all wages paid.  If employers employ more than 500 full-time employees, they are only allowed to claim ERC for those employees who are paid wages but not providing any services. 

The American Rescue Plan Act of 2021, further extended the ERC through December 31, 2021 and expanded its provisions starting with the 3rd Quarter of 2021.  The new provisions allows eligible employers to claim the ERC against the employer share of employment taxes, equal to as much as $7,000 per full-time employee per quarter during the second half of the year.  For calendar quarters beginning after June 30, 2021, ARPA includes the following new ERC provision.

• “Recovery Startup Businesses” established after February 15, 2020, are now eligible for up to $50,000 per quarter, even if other eligibility tests are not met.  Additional guidance will be provided by the IRS.
• Large employers who qualify as a “severely financially distressed employer” (those who experience greater than a 90% decline in gross receipts in a 2021 quarter compared to the same 2019 quarter) will be eligible to include all employee wages when calculating the ERC rather than being limited to wages paid to employees who were not providing services, as in the original version of the program.
• The IRS statute of limitations to make an ERC assessment has been extended from three years to five years.

The American Rescue Plan Act of 2021 states that wages used in connection with a Paycheck Protection Program (PPP) loan, a Shuttered Venue Operator Grant (SVOG), a Restaurant Revitalization Grant (RRG) or Family and Medical Leave Act (FMLA) cannot be used for calculating the 2021 ERC. In addition, a member of a controlled or affiliated service groups are considered a single employer and must aggregate their gross receipts to determine when and if they qualify.  Wages paid to a business owner of 51% or more and their qualifying relatives are not eligible for the ERC. With the extension and expansion of the Employee Retention Credit, employers can claim up to $28,000 per year per employee if they qualify.  In order to claim the credit, eligible employers need to report their total qualified wages and the related health insurance costs for each quarter on their quarterly payroll tax returns (Form 941).  To request an advance payment for the employee retention credits, employers must file Form 7200.   The Employee Retention Credits can offer significant help and benefits to employers for both 2020 and 2021. 

If you have any questions please contact your tax professional at Dermody, Burke, and Brown, CPAs.

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.