2020 Employee Retention Credit Retroactive Changes and 2021 Improvements | Burr & Forman
The Employee Retention Credit, as originally enacted on March 27, 2020 by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), is a tax credit refundable on certain employment taxes equal to 50% of the eligible salary that an eligible employer pays to employees after March 12, 2020 and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act (Relief Act), enacted on December 27, 2020, amended and extended the employee retention credit. On March 1, 2021, the IRS released Notice 2021-20 to provide advice on original employee retention credit, as amended by the Relief Act. The notice is 102 pages long and contains detailed frequently asked questions.
As originally enacted, an employer was generally eligible to claim the Employee Retention Credit if they had not obtained a loan from the Paycheck Protection Program and:
- Had operations that were wholly or partially suspended during a calendar quarter in 2020 due to orders from an appropriate government authority restricting trade, travel, or group meetings (for business, social, religious purposes or others) due to COVID-19; Where
- Saw a significant drop in gross revenue during the calendar quarter. A significant drop is a 50% drop in 2020 from the gross revenue in the 2019 schedule. An employer that experiences a significant drop continues to be eligible until the end of the calendar quarter in which the gross revenue is greater than 80 % of its revenue for the calendar quarter 2019.
As originally enacted, eligible salaries were determined in part based on an employer’s size and subject to an aggregate cap of $ 10,000 per employee for all calendar quarters (effectively capping the 2020 credit at $ 5,000 per employee). An employer who employed 100 full-time employees on average or less in 2019 could generally include all salaries as eligible salaries (but not over salaries for which credit was claimed under the paid leave provisions of Family First Coronavirus. Relief Act). An employer who employed more than 100 full-time employees on average in 2019 could only include wages paid to employees who were not providing services.
The Relief Act retroactively removed the restriction that prevented employers who received a Paycheck Protection Program loan from qualifying for credit. Alternatively, qualifying employers who paid qualifying wages can now retroactively claim employee retention credit (but not on amounts included in wages for the paycheck protection program loan remission). These eligible employers can file a claim for reimbursement by completing Form 941-X to claim the credit on eligible wages paid in 2020.
While the Relief Act allowed employers who had received a loan from the Paycheck Protection Program to claim a tax deduction for underlying expenses paid with the loan proceeds, the Relief Act did not provide for a tax deduction. similar treatment for employee retention credit. An employer who claims the employee retention credit must reduce the expenses that it would otherwise claim for qualifying wages by the amount of the employee retention credit.
The Relief Act extended and improved the employee retention credit for eligible wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers can apply for a credit refundable tax on certain employment taxes equal to 70% of eligible wages. an eligible employer pays employees after December 31, 2020 until June 30, 2021.
During the 2021 period, an employer is an eligible employer if it:
- Has a total or partial suspension from the operation of his trade or business during this period due to government orders restricting trade, travel or group meetings due to COVID-19, or
- A decrease in gross revenue during a calendar quarter in 2021 when the gross revenue for that calendar quarter is less than 80% of the gross revenue for the same calendar quarter in 2019 (to be eligible on the basis of a decrease in gross revenue in 2020, gross receipts had to be less than 50%).
The Relief Act also significantly expands the definition of skilled wages by increasing the employer size threshold from over 100 full-time employees in 2019 to over 500 employees in 2019 for the purpose of determining skilled wages. Thus, eligible employers with more than 100 but 500 full-time employees on average or less in 2019 can generally claim the credit on all eligible wages, even for employees who render services (unlike the 2020 credit). The overall ceiling of eligible salaries remains at $ 10,000 for 2021, but the credit is potentially worth $ 7,000 per employee (compared to $ 5,000 in 2020) due to the increase in the percentage taken into account for the credit (70% in 2021 compared to 50% in 2020).
The rules for employee retention credit, as summarized above, are relatively straightforward. However, employers should thoroughly analyze their credit eligibility taking into account detailed aggregation rules for sizing purposes, assessing the nature of government orders if they are based on the eligibility order, determining the applicable qualifying periods and assessing salaries to determine qualification. (for example, health plan expenses may be eligible, but wages used for paycheck protection program forgiveness are not).