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The Consolidated Appropriations Act of 2021 (CAA) was signed into law on December 27, 2020. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands, among many other items, the Employee Retention Credit (ERC) originally provided by section 2301 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC provisions were set to expire on December 31, 2020, but Sections 206 and 207 of the TCDTR extend the credit to eligible employers through June 30, 2021.
Enhanced ERC Eligibility and Key Changes
The Employee Retention Credit (ERC) is a refundable employment tax credit for employers whose:
- Operations were fully or partially suspended due to a COVID-19-related governmental shutdown order; OR
- Gross receipts decreased by more than 20% when comparing either the current quarter or the prior quarter to the same quarter in 2019 (previously a 50% decrease under the CARES Act). Employers that did not exist in 2019 can use the corresponding quarter in 2020. For example, an employer may be eligible for the ERC for the first quarter of 2021 if either:
- Its gross receipts for Q1 2021 fell by more than 20% when compared to Q1 2019; or
- Its gross receipts for Q4 2020 fell by more than 20% when compared to Q4 2019.
The TCDTR expands the eligible credit on the amount of qualified wages from 50% to 70% for wages paid between January 1, 2021, and June 30, 2021. The maximum eligible wages are also increased from $10,000 per employee per year to $10,000 per employee per quarter. Thus, the maximum credit available in 2021 is $14,000 per eligible employee ($7,000 per quarter).
Under the CARES Act, ‘large employers’ were defined as employers with more than 100 employees. The TCDTR increases this threshold to employers with more than 500 employees resulting in a significant increase in companies eligible for the ERC. Large employers only qualify for the ERC to the extent they pay an employee for not providing services due to a COVID-19 shutdown or significant decline in gross receipts. For small employers, qualified wages are wages paid to an employee during a COVID-19 shutdown or a quarter with a significant decline in gross receipts, regardless of whether the employee is providing the services or not. Thus, large employers only qualify for the ERC to the extent they are paying employees not to work, whereas ‘small’ eligible employers qualify for the ERC even if their employees continue working.
The CAA provides that employers can receive a Paycheck Protection Program (PPP) loan and still qualify for the Employee Retention Credit. However, an employer cannot ‘double-dip’ on the qualified wages paid to employees. Thus, wages paid with forgiven PPP loan proceeds are not eligible for the ERC. Companies should carefully evaluate allowable PPP loan forgiveness costs such as rent, utilities, interest, etc., to maximize payroll costs available for the ERC. Wages utilized for any other tax credit, such as the Work Opportunity Tax Credit or the Families First Coronavirus Response Act (FFCRA) tax credit, also cannot be used in determining the qualified wages for the ERC.
Claiming the Enhanced ERC
The CARES Act provided for an Advanced Payment of the ERC for eligible employers by filing Form 7200. Using this form allows employers to seek immediate funds in lieu of waiting to file their quarterly Form 941 and requesting a refund. The CAA provisions restrict the eligible employers who can request the advance payment in 2021 to small employers only (500 employees or less). The CAA provisions also limit the amount of advance payment you can receive to 70% of the average quarterly wages paid by the employer during 2019. Before submitting Form 7200 for the advanced payment, you should first reduce your employment tax deposits to account for the credits. If you anticipate having additional credits after reducing your total payroll tax deposits, you should consider filing Form 7200 for the advanced payment.
To claim the ERC, an employer must include all qualified wages on Form 941, Employer’s Quarterly Federal Tax Return. If you received an advance payment from filing Form 7200 and the amount received is less than the ERC claimed on Form 941, the advance payment is subtracted from the claimed credit. If the advance payment received exceeds the ERC claimed, the employer must pay back the difference as part of the balance due on Form 941.
If you need assistance applying for the Employee Retention Credit or have any other questions regarding the Consolidated Appropriations Act, the Moore Colson Tax Services practice is here to help. Please contact us for more information.
Joe Wright, CPA, is a Director in the Tax Services practice. In this role, Joe’s primary focus is on tax compliance and planning services for closely-held businesses and their owners. Joe works with clients in the construction, real estate, transportation, hospitality and manufacturing industries.
Elizabeth Michaels is an Associate in the Tax Services practice at Moore Colson. Elizabeth has a Master’s Degree in Tax Accounting from the University of Alabama, and she enjoys researching and analyzing current tax issues to determine client impact.
Brian Renshaw, CPA, is a Partner at Moore Colson in the firm’s Real Estate practice and leads the firm’s hospitality group. Brian works with registered investment advisors who construct, develop, own, lease, syndicate, advise and manage all classes of real estate assets, including hotels, resorts and restaurants.
Jonathan Levens, CPA, is a Partner with Moore Colson’s Tax Services practice. Jonathan’s primary focus is on tax compliance and consulting services for private equity-owned as well as closely-held businesses and their owners in the manufacturing and distribution, retail, service, restaurant, healthcare, staffing and financial services industries.