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Employee Retention Tax Credit Extended Through 2021

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What You Need to Know

  • Important changes will apply beginning in July, when the existing ERTC provisions were to expire.
  • Employers that got a PPP loan can keep claiming the credit.
  • Eligible employers will be entitled to claim the credit for all four quarters of 2021, not just the first two.

The American Rescue Plan Act of 2021 (ARPA) offered across-the-board relief for many individuals and small-business owners. One of the most significant parts of the law is the expansion and extension of the employee retention tax credit (ERTC) through 2021. The law makes important changes that will apply beginning in July 2021, when the existing ERTC provisions were set to expire.

That might mean some business clients will become eligible to claim the credit for the first time later this year — and all clients should pay attention to the changes that have the potential to make the tax credit more valuable, as well as technical changes that could become important down the road.

Extension of ERTC Provisions

Under the ARPA, the employee retention tax credit provides a refundable tax credit of up to 70% of qualified wages in 2021 and 50% of qualified wages in 2020 (up to a $10,000-per-employee, per-quarter cap). Employers who have experienced a 20% year-over-year decline in per-quarter gross receipts (or qualifying suspension of business) remain eligible.

Employers can continue to claim the credit even if they’ve received a Paycheck Protection Program (PPP) loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds. The same is true if the business used funds forgiven under another recovery relief provision, such as a restaurant revitalization grant. 

As under prior law, employers with up to 500 employees can continue to claim the credit with respect to wages paid even if employees provide no services during the relevant time periods. In 2020, the threshold for determining whether an employer could claim credit for wages paid while an employee was not providing services was 100 employees.

Modifications to ERTC Rules

The ARPA codified the employee retention tax credit into new IRC Section 3134. Most of the modifications will apply, at least initially, for the third and fourth quarters of 2021 — when existing ERTC rules were set to expire. That means eligible employers will be entitled to claim the credit for all four quarters of 2021, rather than only the first two quarters — making the credit worth up to $28,000 per employee for 2021.

Beginning June 30, 2021, certain small businesses that began operations after Feb. 15, 2020, will be eligible for a maximum $50,000 per-quarter credit. These businesses, called “recovery startup businesses” under the new law, must satisfy a gross receipts test — meaning that the business’s average annual gross receipts for the three-taxable-year period ending with the taxable year that precedes the quarter cannot exceed $1 million. These businesses can qualify to claim the expanded ERTC even if they do not otherwise meet the eligibility requirements for claiming the credit.

Beginning in the third quarter of 2021, severely distressed employers who have suffered a decline of 90% or more in gross receipts compared with the same quarter in 2019 can treat all wages paid as qualified wages (up to the $10,000 cap). That means employers that are under severe financial distress may be eligible for the ERTC even if the business has more than 500 employees and regardless of whether the employees provide services while receiving wages. As under existing law, the business can use the prior calendar quarter to determine eligibility based on a decline in gross receipts.

The new ERTC will be allowed against the Medicare tax in only the third and fourth quarters of 2021. While procedural shift does not affect the available value of the ERTC, it could be important for business owners who had relied upon taking the credit in advance. Because the Medicare tax is only 1.45%, more clients might be required to file a Form 7200 to receive advance payment of the credit.

The ARPA also extends the statute of limitations on assessments with respect to the ERTC from three years to five years from the date the tax return claiming the credit is filed (or treated as filed).

Conclusion

As always, it is expected that the IRS and agencies will continue to provide guidance on implementation of the new law — which, as we’ve seen, could be applied retroactively. Both small- and larger-business clients should pay close attention to the new changes to the ERTC created by the latest stimulus relief legislation, as well as releases from the IRS, the Department of Labor and related agencies. 

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