Key Changes to the Employee Retention Credit

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On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law. A recent article from JD Supra outlines two key provisions included in the act that make changes to the employee retention credit.

Established by the CARES Act, the employee retention credit was designed to incentivize employers to maintain their staff in the midst of the coronavirus pandemic. For the period from March 13, 2020 to December 31, 2020, eligible employers could claim a 50% retention credit for qualified wages, capping out at $5,000 per employee.

The CAA both extends and expands the employee retention credit, including making retroactive changes to it for 2020. It does so via two provisions:

Section 206 – This provision makes retroactive changes back to March 13, 2020, when the ERC was established. Firstly, the ERC is now eligible for recipients of loans through the Paycheck Protection Program (PPP). Previously, PPP participants were barred from claiming the ERC. Employers should note that they may not claim the ERC on wages paid with forgiven PPP loan funds.

Secondly, Section 206 offers clarification regarding “qualified health plan expenses” and the ERC. It explains that these expenses are, indeed, eligible for the ERC, even when they are attributable to a furloughed employee who is not receiving any other compensation at the time.

The third change—another clarification—is in regard to the “gross receipts” test for tax-exempt organizations. In determining their eligibility for the ERC, tax-exempt organizations must account for all gross receipts, not just those from unrelated trade or business activities.

Lastly, Section 206 offers employers a means for catching up on unclaimed ERC for 2020. Employers should claim the additional ERC on their fourth quarter Form 941, which is due by January 31, 2021. Further guidance in this area is expected this month.

Section 207 – This second provision includes an extension of the ERC for the period from January 1, 2021 to June 30, 2021. Additionally, it expands the ERC in the following ways:

  • Increases the credit from 50% to 70%, for the portion of 2021 that the ERC covers.
  • Adjusts the per-employee cap on the ERC to $7,000 per quarter.
  • Decreases the eligibility threshold from a 50% decline in gross receipts to a 20% decline.
  • Expands eligibility for the ERC from employers with up to 100 employees to employers with up to 500 employees.
  • Eliminates the qualified wages cap for employee pay increases.
  • Eliminates the option to receive advance payment of the ERC via IRS Form 7200 and/or IRS Form 941 for employers with more than 500 employees.
  • Expands the availability of advance payments of the ERC for employers with 500 or fewer employees.
  • Creates a process for repaying advance payments of the ERC, in the event of excess payments.
  • Makes some governmental employers eligible for the ERC in 2021.
  • Maintains the non-eligibility of the ERC for wages accounted for under IRC Section 45S and expands the non-eligibility to also cover wages accounted for under IRC Section 41, IRC Section 45A, IRC Section 45P, IRC Section 51, and IRC Section 1396.
  • Requires the U.S. Small Business Administration and the IRS to coordinate in a public awareness campaign targeting employers eligible for the ERC.

For further details, click here to read the article in full at JD Supra.