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The IRS recently issued new guidance regarding the Employee Retention Credit (ERC) as a result of the American Rescue Plan (ARP) passed by Congress in March 2021.
WHAT IS THE ERC?
The ERC was originally passed in March 2020 as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The legislation at that time provided a credit for up to 50% of qualified wages per employee, per quarter for wages paid between March 13, 2020, and December 31, 2020. Qualified wages were not to exceed $10,000 per employee for each quarter the employer qualified for the credit. The maximum credit was $5,000 per employee.
The Consolidated Appropriations Act of 2021 provided new updates to the ERC and extended the credit through the first two quarters of 2021. For wages paid between December 31, 2020, and June 30, 2021, employers can receive a refundable credit of the employer share of Social Security taxes paid up to 70% of qualified wages per employee, per quarter. The credit increased the maximum allowed from $5,000 to $7,000 per employee, per quarter.
In addition, employers were eligible to receive an advance on the ERC in two ways. First, employers can access the credit by reducing the employment tax deposits throughout the quarter if they believe they qualify for the credit.
Second, eligible small employers (those with no more than 500 employees) may request an advance of the ERC by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. This advance is no longer available to large employers in 2021. A full-time employee is defined as one who worked 30 hours per week or more during any month in 2019 or who worked more than 130 total hours during a month.
Employers who also received Payroll Protection Program (PPP) may be eligible to receive the ERC. You should consult with your accounting provider to determine what wages will be eligible.
The ARP provides some additional guidance regarding eligibility and extension of the ERC benefits. It also provides the same provision for a 70% eligible credit for each employee, each quarter on a maximum of $10,000 in qualified wages. The new legislation extended the benefit for the third and fourth quarters of 2021.
The ARP also expands eligibility requirements for employers who may receive the credit. Many colleges, universities, and entities that provide hospital and medical care will now qualify for the credit. In addition, certain start-up businesses which began operations after February 15, 2020, and were forced to close as a result of a government mandated shutdown may be eligible to claim up to $50,000 in credits.
WHO WILL QUALIFY FOR THE ERC?
In order to qualify for the ERC, one of two factors must be present during the quarter that the employer is seeking to request the credit in order to qualify.
Suspension of Operations via Government Order
Businesses that were forced to partially or completely suspend operations or reduce business hours due to a government order may be eligible to claim the credit. A business is only allowed to claim the credit for the portion of the quarter that the shutdown or business reduction order was in place.
Businesses that are required to shut down but have the ability to continue operations largely remotely may not be eligible for the credit. Entities considered to be essential business are also ineligible to claim the credit unless there are significant supply disruptions that impact the business’ operations.
Significant Decline in Gross Receipts
Businesses that experience a 50% decline in gross receipts when compared to the same quarter in 2019 may be eligible to take the credit. A business will no longer qualify for the credit if in the following quarter gross receipts exceed at least 80% of gross revenues for the same period in 2019.
If you have any questions regarding your eligibility for the ERC, please contact DMJ.