We’d like to inform you of a possibly significant tax credit expanded to many businesses under the “COVID-19 Bill” recently passed by Congress.
An employee retention tax credit was first introduced in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act or CARES Act. The credit is available to eligible employers who retained employees during the COVID-19 pandemic. This credit was originally not available to PPP Loan recipients who received loan forgiveness.
The new relief legislation (The Consolidated Appropriations Act) enacted in December 2020 modified the Employee Retention Credit in ways that will provide expanded material tax benefits to many businesses. Every employer needs to review these rules to determine if they apply.
Key changes under the Consolidations Appropriations Act of 2020:
- A key retroactive change is that employers who took PPP loans are now eligible to take the Employee Retention Credit, with the one restriction that the wages paid with forgiven PPP loan proceeds are not eligible for the Employee Retention Credit.
- Most of the changes are effective as of January 1, 2021 and impact the first two quarters of 2021.
- Effective January 1, 2021, the following entities are now eligible for the credit who were previously not:
- Public colleges or universities
- Organizations whose principle purpose is providing medical or hospital care
- Certain organizations chartered by Congress (e.g., FDIC, Federal Home Loan Banks, etc.)
- The new law defines gross receipts for tax exempt entities to include contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income.
What is the Employee Retention Credit?
During 2020, the credit is 50% of the qualified wages paid to an employee, plus the cost to continue providing health benefits to the employee. There is an annual credit cap of $5,000 per employee ($10,000 in qualified wages X 50% limit.)
Beginning January 1, 2021, the credit is increased to 70% of qualified wages, plus the cost to continue providing health benefits to the employee. The cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages X 70% limit) for a possible $14,000 credit per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.
What are qualified wages?
Qualified wages include gross wages, plus the employer cost of health insurance. Wages for purposes of the Employee Retention Credit include wages not funded with PPP loan proceeds.
What employers qualify for the Employee Retention Credit?
Most employers, including tax exempt organizations, can qualify for the credit. One of the two following events must have occurred in order to qualify for the credit.
- The business must have been fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- An employer had a significant decline in gross receipts.
- During 2020 this was defined as a drop in gross receipts in a calendar quarter in 2020 that is 50% lower than the gross receipts earned in the same calendar quarter in 2019.
- Beginning in 2021, this is defined as a drop in gross receipts in the first two quarters of 2021 that are 20% lower than the gross receipts earned in the same calendar quarter in 2019, or preceding quarter such as the fourth quarter of 2020.
If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because they were not in business yet.
What impact does the size of your business have on whether an employee is working or not?
During 2020 a company with more than 100 full-time employees could not take the credit for wages paid to an employee performing services for the employer. A company with 100 or fewer employees was eligible for the credit, even if the employees were working.
Beginning in 2021, the threshold is increased to 500 full-time employees. An employer with 500 or fewer employees will be eligible for the credit even if the employees are working. When calculating the 500-employee threshold, the employees of all affiliated companies sharing more than 50% common ownership are aggregated.
How does an employer claim the credit?
The employee retention credit is allowed against the employer’s share of Social Security Taxes. The credit is fully refundable. If the credit exceeds the employer’s portion of Social Security Taxes in any calendar quarter, the excess is refundable to the employer.