On March 11, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA). This relief bill comes in response to the continued COVID-19 pandemic and makes some changes to the Employee Retention Tax Credit (ERTC) that was originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and later expanded and extended under the Consolidated Appropriations Act (CAA) of 2020. Below we dig into the changes and expansions that were part of the CAA and the recently enacted ARPA.
QUICK REFRESHER ON THE ORIGINAL ERTC
Let’s first revisit the provisions of the ERTC in the original CARES Act. Enacted in the spring of 2020, the Act allowed businesses to take a credit against payroll taxes in order to help offset some of the business losses due to COVID-19. The law allowed eligible employers to take a credit of 50% of qualified wages up to $10,000 paid to employees between March 12, 2020 and January 1, 2021. Consequently, the maximum credit for each employee was $5,000 ($10,000 in wages X the 50% tax credit rate).
However, not every business was eligible for this credit. Businesses must have been significantly impacted by COVID-19 either by a shutdown order or by experiencing a significant reduction in revenue. There were also restrictions on which wages were “qualified” if an employer had more than 100 full-time employees. Businesses were also not allowed to take the credit if they used Paycheck Protection Program (PPP) loans to cover employee payroll costs.
UPDATES AND EXPANSIONS TO THE ERTC
The passage of both the CAA and the newly signed ARPA relief bill is good news to many businesses who continue to feel the economic impacts of the pandemic as the laws enhance and expand many provisions of the original ERTC. Under the CAA of 2020, the ERTC was extended until June 30, 2021 and increased the tax credit to 70% of qualified wages for each of the first two quarters of 2021.
With the newly enacted ARPA legislation, the ERTC has been extended again – this time through December 31, 2021. This means an employer eligible for the ERTC in all four quarters of 2021 could receive up to $28,000 in credits per employee ($10,000 quarterly wage cap x 70% x 4 quarters).
More businesses will be eligible for the ERTC in 2021. The original ERTC was only available for businesses who were forced to shut down or whose gross receipts in 2020 were 50% less than the same quarter in 2019. The CAA modified this reduction in revenue by 30%. Under the CAA guidelines, the test was satisfied for either of the first two quarters of 2021 if gross receipts were less than 80% of the gross receipts for same quarter in 2019. The ARPA extends the 80% gross receipts test for the third and fourth quarters of 2021 as well.
ERTC Wage Threshold
A change in the threshold for determining which wages “qualify” for the tax credit will also benefit employers in 2021. Under the original CARES act, for businesses with less than 100 full-time employees, all wages qualified for the tax credit, regardless if the employee’s role changed or not due to the pandemic. Whereas businesses with over 100 employees could not claim the credit for employees that were still performing services for the business.
The CAA, effective January 1, 2021, raised the threshold number to 500 employees. In addition, the ARPA, effective July 1, 2021, also includes a new provision for “severely financially distressed employers.” These employers are defined as those whose gross receipts are less than 10% of the gross receipts for the same quarter in 2019. If an employer meets this definition, they may treat all wages paid to employees as qualified wages regardless of the number of full-time employees.
Employers with PPP Loans
Initially, the CARES Act prohibited employers who had received a PPP loan from also utilizing the ERTC. The CAA allowed an employer to claim the credit for any wages paid beyond the proceeds of the PPP loan that have been forgiven. This change is retroactive to the effective date under the original law: March 12, 2020. A company that received a PPP loan in 2020 but paid qualified wages beyond the amount of the loan could benefit by filing an amended Form 941 and claiming the credit.
NEW ENHANCEMENTS TO THE ERTC
While many provisions of the CAA and the ARPA enhanced the CARES Act, they also include some brand-new provisions as well. Under the CAA, businesses can take an advanced payment on their credit even if those wages have not yet been paid. Additionally, some government entities not previously allowed to take the credit became eligible with the passage of the CAA, such as public universities, hospitals, federal credit unions, etc.
The ARPA also allows a startup business to take the ERTC even if the business does not meet the other ERTC eligibility tests. To qualify the business must have been established after February 15, 2020 and have annual gross receipts of no more than $1 million. The recovery startup credit is capped at $50,000 per quarter, per employer.
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