The Consolidated Appropriations Act, 2021 (the “CAA”) extends through June 30, 2021, the Employee Retention Credit provisions of Section 2301 of the CARES Act. It also favorably modifies the rules for claiming the Employee Retention Credits.
These changes are generally effective as of January 1, 2021. These provisions of the CAA are found in Sections 206 and 207 of Division EE, called “The Taxpayer Certainty and Disaster Relief Act of 2020”.
Section 2301 of the CARES Act provided tax credits to certain employers who paid employees during a calendar quarter in 2020 in which:
- The operations of the business were fully or partially suspended, or
- The gross receipts of the business are less than 50% of the gross receipts from the same calendar quarter in the prior year.
The amount of the employer’s tax credit was 50% of the wages paid (up to certain limits) and 50% of any “qualified health plan expenses”.
If an employer had 100 or less employees, all wage payments to employees during the calendar quarter were counted toward the credit, including wages paid to both employees at work and employees who were laid off or furloughed. Employers with more than 100 employees could only get the credit for wages paid to employees who were laid off or furloughed.
CAA Modifications – Overview
Beginning January 1, 2021, an employer can claim a tax credit for 70% of the wages paid to an eligible employee. In addition, the amount of “qualifying wages” that can be counted for an eligible employee in each calendar quarter has been increased to $10,000 per employee.
To claim the credit for a calendar quarter, the employer has to either:
(i) Experience a partial or full suspension of operations due to a COVID-19 related government order that limits commerce, travel or group meetings; or
(ii) have gross receipts for the calendar quarter that are less than 80% of the gross receipts for the same quarter in 2019.
In addition, at the option of the employer, the prior year calendar quarter in 2019 can be used to measure the gross receipts test.
If the employer did not exist in 2019, the same calendar quarter in 2020 is used to test gross receipts, and that an employer also can make an election use the prior calendar quarter in 2020.
Expanded Credits for Employers with 101 to 500 Employees
In 2021, the availability of the credit has been expanded for employers with 101 – 500 employees.
In 2021, if an employer employed an average 500 or less full-time employees in 2019, the employer can claim the tax credit for all employees who are paid wages during the calendar quarter. In other words, for those employers, the credit can be claimed for wages paid to employees who are working and wages paid to employees who are laid off or furloughed.
If an employer employed an average of more than 500 employees in 2019, the employer can only claim the credit to the extent that wages are paid to employees who are laid off or furloughed.
Special rules are provided for counting the average number of employees who were employed in 2019. Other special rules address employers who were not in business for all of 2019.
Other Technical Changes
The CAA also modifies a number of other rules pertaining to the claiming of the Employee Retention Credits. Highlights are:
- There are technical modifications to the rules for claiming credits based on the payment of “qualified health plan” expenses for eligible employees. These changes are retroactive to March 23, 2020. If additional credits are due to an employer for prior calendar quarters in 2019 based on the payment of qualified health plan expenses, those credits can be claimed when filing IRS Form 941 for the fourth quarter of 2019.
- The Employee Retention Credit is now available to an employer who received a Paycheck Protection Program loan. These changes are retroactive to March 23, 2020. However, to the extent that an eligible employee’s wages are used to substantiate forgiveness of a PPP loan, those same wages cannot also be used to claim the Employee Retention Credit.
- State and local government employers are still not eligible for the Employee Retention Credits. However, an exception is made for colleges and universities that are tax-exempt under Section 501(c) of the Internal Revenue Code, if the principal purpose of the organization is to provide medical or hospital care.
- Employee Retention Credits are not available if the wages are used to claims various other types of tax credits related to employment of employees.