The American Rescue Plan Act of 2021 (Rescue Act) includes changes to the Employee Retention Credit (ERC) initially provided for in the CARES Act. The current version of the ERC provides eligible employers that have experienced a significant decline in gross receipts the ability to claim a payroll tax credit of 70 percent of qualified wages up to a wage limit of $10,000 per employee per calendar quarter. Previously available until June 30, 2021, the Rescue Act further extends the ERC through December 31, 2021.
While the ERC continues to be refundable, for the last two quarters of 2021, the Rescue Act provides that the ERC may only be claimed against the employer’s share of the Medicare tax (equal to 1.45 percent of wages) rather than against the employer’s share of the social security tax (equal to 6.2 percent of wages). This change will potentially impact the ability of an eligible employer to claim the ERC immediately. Instead, an employer may be required to file for an advance payment of the ERC (Form 7200).
In defining qualified wages, the Rescue Act retains the distinction between large (average of more than 500 full-time employees during 2019) and small (average of 500 or fewer full-time employees during 2019) employers. For large employers, qualified wages continue to be wages paid to an employee who is not providing services (including certain health plan expenses) due to the circumstances that caused the employer to be eligible for the ERC. For small employers, however, the Rescue Act modifies the definition of qualified wages to includes all wages paid during (1) a period of full or partial suspension of operations due to certain COVID-19-related governmental orders or (2) the calendar quarter for which the gross receipts test was met.
For wages paid after June 30, 2021, the Rescue Act expands the availability of the ERC to two categories of employers. First, the ERC can now be claimed by “recovery startup businesses,” which are defined as those employers that (i) began carrying on any trade or business after February 15, 2020, and (ii) have average annual gross receipts over a three-year lookback period (prorated for partial years) that do not exceed $1 million. The maximum credit can that be claimed by a recovery startup business is $50,000 per calendar quarter. The second expanded category of eligibility is for “severely financially distressed employers.” This second category includes employers that have experienced a decline of more than 90 percent in quarterly receipts, measured on a year-over-year basis from 2019 to 2021. This rule will allow any employer (whether small or large) under severe financial distress to treat any wages paid as qualified wages whether or not its employees actually provide services.
Interestingly, the statute of limitations for assessments relating to the ERC was extended under the Rescue Act from three years to five years. This change allows the IRS additional time to audit employment tax returns on which the ERC is claimed.
As discussed in our previous alert, employers that received a Paycheck Protection Program (PPP) loan are eligible to claim the ERC, provided that the same wages are not counted both for seeking forgiveness of the PPP loan and calculating the ERC. The Rescue Act provides that additional guidance is forthcoming regarding situations in which employers excluded wages from their ERC calculation due to their inclusion in the PPP loan forgiveness, and the PPP loan was subsequently not forgiven resulting in the wages being excluded from both the ERC and the PPP.
Finally, qualified wages paid by an employer and taken into account as payroll costs in connection with (1) second draw PPP loans, (2) grants for shuttered venue operators, and (3) restaurant revitalization grants are not eligible for the ERC.
If you have any questions regarding the content of this alert, please contact Danielle Katz, associate, at dkatz@barclaydamon.com; Gerry Stack, Tax Practice Area co-chair, at gstack@barclaydamon.com; Nick Scarfone, Tax Practice Area co-chair, at nscarfone@barclaydamon.com; or another member of the firm’s Tax Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.