Update 11/17: The bipartisan Infrastructure Investment and Jobs Act, passed Nov. 15, 2021, has generally ended the fourth quarter availability of the ERC for most employers. Read more here.
Text and decision trees last updated 5/3 to reflect new information regarding 2021 Q3/Q4 and to clarify questions regarding 2020 and 2021 eligibility.
In early August 2021, the IRS released additional ERC guidance on matters including whether the wages of a majority owner of a corporation and their family members can be ERC-eligible; how various calculations apply to businesses not open in 2019; whether forgiven PPP loan amounts and other COVID-19 relief grant amounts should be included in the "significant decline in gross receipts" test; and more. Read our overview.
For 2020, certain employers whose operations were fully or partially suspended due to a COVID-19-related government order or whose gross receipts for any 2020 quarter were less than 50% of their gross receipts for the same quarter in 2019 were eligible for a fully refundable federal payroll tax credit called the Employee Retention Credit (ERC) for certain wages paid in 2020 Quarter 2 (for ERC purposes, March 13-31, 2020, is considered part of 2020 Q2), Q3, or Q4. However, if the employer or any member of its controlled group received a Paycheck Protection Program (PPP) loan, the entire controlled group was ineligible for an ERC.
The December Consolidated Appropriations Act of 2021 provided for both retroactive applicability of the ERC for 2020 and extending and expanding the ERC for the first two quarters of 2021, and liberalized the ERC requirements for 2021. Significantly, it made it so that an employer that did not take an ERC for 2020 because it or its controlled member received a PPP loan may now be eligible for ERCs for 2020.
Now, as of the March 11 passage of the American Rescue Plan Act, the ERC is available for all four quarters of 2021. The newer Act extended the availability of the ERC to the third and fourth quarters of 2021, each with its own $10,000-per-employee maximum amount of Qualified Wages/Qualified Health Plan expenses. However, the ERC will be a credit against the Medicare tax for the third and fourth quarters, as opposed to its previously being a credit against the Social Security tax.
The newer Act also added new ERC eligibility opportunities for 2021 Q3 and Q4 for “recovery startup businesses” and “severely financially distressed employers” – read more below – and extended the limitation period on ERC-related assessments from three years to five years from the date of filing the applicable Form 941.
Definition of ‘eligible employer’
To receive an ERC, an employer must qualify as an “eligible employer.” “Employer” here includes all members of a controlled group under IRC Section 52 (e.g., for a parent and subsidiaries, based on a greater than 50% ownership test) or Section 414(m) (affiliated service group) on an aggregated basis.
“Eligible employer” is defined as:
For 2020, an employer that:
(1) Fully or partially suspended its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19 (Employer is eligible to claim the ERC for the suspension period), or
(2) Had gross receipts for any 2020 quarter that were less than 50% of its gross receipts for the same quarter in 2019. (Employer is eligible to claim the ERC for the quarter with the decline in gross receipts and for the next following quarter; eligibility ends for the quarter after the quarter for which gross receipts return to greater than 80% of the gross receipts for the same quarter in 2019 (unless that quarter has its own greater-than-50% decline when compared to the same quarter in 2019).)
For 2021, an employer that:
(1) Fully or partially suspends its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19 (employer is eligible to claim ERC for the suspension period), or
(2) Has gross receipts for any such quarter or for the immediately preceding quarter that are less than 80% of its gross receipts for the same quarter in 2019.
Amount of ERC
For 2020 Q2, Q3 and/or Q4 (for Q2, including March 13 - March 31, 2020), an employer can receive a credit equal to 50% of the first $10,000 of Qualified Wages paid per employee in the aggregate for all qualifying quarters. The maximum ERC for all of 2020 would be $5,000 per employee receiving Qualified Wages.
For 2021, an employer can receive 70% of the first $10,000 of Qualified Wages paid per employee in each qualifying quarter. The maximum ERC for each such quarter would be $7,000 per employee receiving Qualified Wages, and the maximum ERC for 2021 would be $28,000 per employee receiving Qualified Wages.
What counts as “Qualified Wages” is different for “small” and “large employers.”
For small employers: All wages paid to and Qualified Health Plan Expenses paid for all employees for the applicable quarter.
For large employers: Only wages paid to and Qualified Health Plan Expenses paid for employees for a period or periods that the employees did not perform services for the employer.
“Qualified Health Plan Expenses” are amounts paid or incurred by an employer to maintain a group health plan that are allocable to Qualified Wages. (This amount includes employer payments plus employee contributions made on a pre-tax basis.) Even if no wages are paid but health plan coverage is provided (e.g., coverage is continued for furloughed employees), the expenses constitute Qualified Health Plan Expenses and as such, are ERC-eligible.
The definitions for “small” and “large” employer are also different for 2020 and 2021:
For 2020 Q2, Q3 and/or Q4 (for Q2, including March 13 - March 31, 2020): For 2019, averaged 100 or “fewer full-time employees” (average of 30 hours per week or 130 hours per month).
For 2021: For 2019, averaged 500 or fewer full-time employees.
For 2020 Q2, Q3 and/or Q4 (for Q2, including March 13 - March 31, 2020): For 2019, averaged more than 100 full-time employees.
For 2021: For 2019, averaged more than 500 full-time employees.
The IRS confirmed in early March that the “full-time employee” test does not take part-time employees into consideration, such that the only employees that will be counted are the ones who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or had 130 hours of service in the month. Thus, employers with many part-time employees that would have been “large employers” if they were counted, but are “small employers” without them, will be able to claim far greater ERCs as “small employers.”
Additional ERC opportunities for 2021 Q3 and Q4: Recovery startup businesses and severely financially distressed employers
For 2021 Q3 and Q4 only, the American Rescue Plan Act added an alternative eligibility standard if the employer is a “recovery startup business,” which is defined as follows:
- The employer began carrying on any trade or business after Feb. 15, 2020, and
- The employer’s average annual gross receipts (as determined under Section 448(c)(3)) for the up-to-three-year period before the applicable quarter did not exceed $1 million.
Note that the ERC is limited to $50,000 per quarter for an employer that is a recovery startup business.
Also for 2021 Q3 or Q4 only, an employer with any number of full-time employees in 2019 can qualify for “small employer” treatment if it constitutes a “severely financially distressed employer,” which is defined as:
- An employer that has gross receipts for a quarter that are less than 10% of its gross receipts for the same quarter in 2019 (i.e., a gross receipts reduction of more than 90%).
ERC/PPP interaction under the Consolidated Appropriations Act
Under the December Act, even where an employer received/receives a PPP loan, the employer can still claim an ERC with respect to Qualified Wages. However, the same wages cannot be used both to qualify for forgiveness of a PPP loan and as ERC Qualified Wages. (The IRS has stated in a Notice that the amount of Qualified Wages included in “Payroll Costs” reported on a 2020 PPP loan forgiveness application are not 2020 ERC-eligible to the extent they were needed and used to obtain PPP loan forgiveness; see our full article for details.)
3 possible scenarios in which an ERC would now be allowed include:
1) A controlled group member received a PPP loan and another member of the same controlled group that did not receive a PPP loan wishes to claim an ERC.
2) The employer’s Qualified Wages were not provided by the proceeds of a PPP loan.
3) The employer’s Qualified Wages were provided by the proceeds of a forgiven PPP loan for which forgiveness was not obtained with the same wages that would be used as ERC Qualified Wages.
The best-case 2020 scenario of a $5,000 ERC per employee, combined with the best-case 2021 scenario of a $28,000 ERC, represents significant assistance to employers that meet the eligibility requirements, either due to suspension of operations or a significant decline in gross receipts. We anticipate further regulatory guidance and we will provide additional information as it becomes available.
Employers will need to be mindful of the impact of the “controlled group” concept. In that regard, an employer that maintains a trade or business becomes eligible either by any member of its controlled group experiencing a complete or partial suspension of the operations of that trade or business, or on the basis of the gross receipts of the entire controlled group. Access our ERC decision trees below to assist your understanding of your ERC eligibility for 2020 and 2021.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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