Employee Retention Credit Helps Employers Conserve Cash
The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020, extended the December 31, 2020 expiration date of the Employee Retention Credit (the Credit) to July 1, 2021. This credit is applied dollar-for-dollar against an employer’s quarterly payroll tax liability and any excess is refundable to the taxpayer. Additionally, the law increased the 50% limit on qualified wages to 70% of qualified wages effective for calendar quarters beginning after December 31, 2020.
The maximum $10,000 limit per employee has been changed to a maximum of $10,000 per employee per calendar quarter beginning January 1, 2021. For purposes of the Credit, employer-funded health plan costs that are excluded by the employee count as wages. If an employee has no wages, but the employer pays an employee’s group health plan expenses, then these expenses count towards the $10,000 limit. These expenses can also be applied retroactively to 2020.
The maximum number of full-time equivalent employees has been increased from 100 to 500. A full-time equivalent employee is defined as an employee who works 30 or more hours per week. For employers with up to 500 employees, the Employer Retention Credit applies to all employees, whether working or not, but for employers with more than 500 employees, the employees must be working for the wages to count towards the Credit.
Effective for calendar quarters after December 31, 2020, a significant decline in gross receipts means a greater-than-20% decline in relation to the same calendar quarter in 2019, rather than the 50% decline in gross receipts under the old law. If the employer was not in existence as of the beginning of the same calendar quarter in 2019, the employer can use the corresponding calendar quarter of 2020 to determine whether a 2021 calendar quarter experienced a significant decline in gross receipts.
Employers can also elect to use the immediately preceding calendar quarter and compare to the corresponding 2019 quarter. For example, to determine if a company qualifies for the Credit for Quarter 1, 2021, the company can compare its gross receipts for the quarter ended December 31, 2020 with the quarter ended December 31, 2019, to determine if the 20% decline in gross receipts test is met. Gross receipts are defined as total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments and any income from incidental or outside sources.
For example, in addition to sales and services, gross receipts would also include interest, tax-exempt interest, dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer’s trade or business. Gross receipts are generally not reduced by cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold. Gross receipts do not include the repayment of a loan, or amounts received with respect to sales tax if the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the sales tax to the taxing authority.
The Credit is also available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.
Finally, if an employer experiences a full or partial suspension due to a governmental order, then qualified wages paid to those employees would be subject to the Employer Retention Credit based on the facts and circumstances.
A governmental order is defined as the following:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period.
- A state’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location.
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Whether the operations of a trade or business are considered essential or non-essential will often vary from jurisdiction to jurisdiction. An employer should determine whether it is an essential or non-essential business by referring to the governmental order affecting the employer’s operation of its trade or business.
If you have any questions on the Consolidated Appropriations Act, 2021 and how it may affect your business, please feel free to reach out to our tax professionals for more information.
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