Consolidated Appropriations Act, H.R. 133
Enacts Extensions and Modifications to the Employee Retention Credit
The following information highlights the key tax issues associated with the Consolidated Appropriations Act, H.R. 133 law changes providing extensions and modifications to the employee retention credit. The employee retention tax credit was introduced as part of the CARES Act and allows for a refundable credit against the employer’s share of Social Security employment taxes (i.e., the 6.2% employment tax). The credit was not limited by the taxpayer’s number of employees. As originally enacted under the CARES Act, borrowers under the SBA’s Paycheck Protection Program (PPP) were not eligible to claim the employee retention credit. The new law changes allow PPP borrowers to claim the credit retroactively to March 12, 2020 and extends the credit through June 30, 2021 as discussed below:
PPP borrowers may now claim the employee retention credit retroactively for wages paid after March 12, 2020. However, the credit may not be claimed on the same wages (and health care employer provided costs) that also qualify for PPP loan forgiveness. The computational rules for determining the 2020 credit are not changed by the new law. Thus, in order to qualify for the credit in 2020, the taxpayer must demonstrate that either: (1) the business operations were fully or partially suspended during at least one calendar quarter during the 2020 tax year due to governmental authority related to the COVID crisis, or (2) the business suffered a decline in its gross receipts of more than 50% in any 2020 quarter, compared to the corresponding quarter in 2019. Once a more than 50% decline in gross receipts has occurred, the credit eligibility continues until the taxpayer’s gross receipts return to at least 80% of the gross receipts level for the same 2019 quarter used to determine the gross receipts decline.
The amount of the credit for 2020 is limited to 50% of $10,000 maximum annual wages, i.e., $5,000 maximum credit per employee. The new law allows health care costs to be included in the amount eligible for the credit, even if the employee had been furloughed. Further, if the taxpayer had more than 100 full time equivalency employees during 2019 (this measurement includes affiliated entities under single employer IRS rules), the taxpayer may only claim a credit for wages paid to those employees who are not providing services due to either business closures under governmental authority or decline in gross receipts.
2021 Extension of Credit and
Modifications to Computational Rules
The Act extends the employee retention credit for wages paid from January 1, 2021 through June 30, 2021 with the following computational changes:
For 2021, the credit amount is 70% of up to $10,000 creditable wages per quarter. As discussed above, for 2020, the credit is based on a 50% x $10,000 annual wage cap. Further, the gross receipts test is modified for 2021 by requiring a decrease in gross receipts of more than 20% compared to the same quarter in 2019. By election, the taxpayer may elect to satisfy the gross receipts reduction by comparing
the immediately preceding quarter to the corresponding quarter in 2019. The new law retains the full or partial closure eligibility rule associated with governmental authority for 2021. In addition, the large employer rule requiring eligible wages to count only for those employees who are paid not to provide services is raised from more than 100 employees to more than 500 employees.
Other Relevant Tax Issues
Associated with the Employee Retention Credit
The IRS has indicated that deductions for the portion of employee wages will be non-deductible to the extent of the employee retention credit amount under rules similar to IRC Section 280C (generally applicable to the Work Opportunities tax credit). Refundable tax credits are not required to be included in the taxpayer’s gross income. In addition, the new law provides that effective for tax years beginning January 1, 2021, the research tax credit can not be claimed on the same wages that also qualify for the employee retention credit.
For those taxpayers who borrowed under the PPP loan program, there may be opportunities to calculate and amend payroll tax returns for 2020 if the eligibility tests discussed above are met. The retention credit may not be claimed on the same wages that are used to qualify for PPP loan forgiveness.