Have you considered the changes to the Employee Retention Credit in the Consolidated Appropriations Act of 2021?
The Consolidated Appropriations Act of 2021 (CAA), was signed into law on December 27, 2020, and made three retroactive changes to the Employee Retention Credit (ERC) that may impact your organization.
The first and most notable change is related to PPP loan recipients who under previous law did not qualify for the ERC. Under the CAA, employers that received a PPP loan may now, subject to other original eligibility requirements, qualify for the ERC. If an organization does qualify, only wages that were not covered with proceeds from a PPP loan that is forgiven should be considered.
The CAA also clarifies how tax-exempt entities determine “gross receipts” when determining eligibility for the ERC. Finally, the CAA outlines that group health care expenses can be considered “qualified wages” even under circumstances where no other compensation is paid to an employee.
The flow chart below can be used as a starting point when determining if your organization may be eligible for the credit-related to the calendar year 2020.
It is important to note, if the employer qualifies for the ERC under the circumstance where the employer’s business was fully or partially suspended by government order due to COVID-19, the employer may only claim the credit for the quarters in which the restrictions were in effect. Additionally, the credit is not available for federal, state or local government organizations for 2020.
Claiming the ERC
In order to claim the ERC, eligible employers report their total qualified wages and the related health insurance costs on their quarterly employment tax returns (Form 941 for most employers). For 2020 qualified wages, the CAA makes a special provision where an employer who has previously filed a Form 941 before December 27, 2020, may elect to treat any applicable amount as paid in quarter four of 2020 on their quarter-four Form 941 due January 31, 2021.
Eligible employers with qualified wages in current and future quarters also have the option of obtaining the credit by –
- Reducing employment tax deposits – eligible employers may be immediately reimbursed for the credit by decreasing the required deposit with the U.S. Department of Treasury related to payroll taxes withheld from employees’ wages.
- Applying for an advance refund – eligible employers may submit Form 7200 to obtain an advance refund of the ERC at any time during the quarter. The completed Form 7200 may be faxed to 855-248-0552.
An eligible employer who utilizes a reduction in employment tax deposits or applies for an advance refund should reconcile these credit amounts on Form 941 for the applicable quarter.
Extensions and expansions for 2021
In addition to the three retrospective changes noted above, the CAA extends and expands the Employee Retention Credit in 2021. Below is a summary of some of the changes that will apply from January 1 to June 30, 2021.
- The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
- The credit rate is increased from 50% to 70% of qualified wages.
- The limit on per-employee wages was increased from $10,000/year to $10,000/quarter.
- If the business was not in existence in 2019, or if prior year gross receipts information is not available, the prior quarter gross receipts can be used to determine eligibility.
- The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
- The credit is available for certain government instrumentalities.
Each of the changes above should be carefully considered in 2021 as many organizations that did not qualify for the credit in 2020 may qualify for the credit in 2021. Further details and clarification regarding the extension and expansion of the ERC are anticipated in the coming days.
The Anderson ZurMuehlen Team is always available for any questions you may have regarding the Employee Retention Credit. Please reach out with any questions and be on the lookout for additional information.
This article is written by Grace McKoy, a Shareholder out of our Missoula office.