Employee Retention Credit Update

In accordance with the American Rescue Plan Act (ARPA) passed in March of 2021, Notice 2021-23 expands the benefits of the “employee retention credit” (ERC) for 2021.

The ERC available to an employer is claimed as a credit against the employer’s share of Social Security tax. There is also a refundable portion of this credit that can help offset other portions of the employer’s payroll tax liability.

Generally, the ERC is available to employers whose business gross receipts in 2020 and 2021 were at least 50% or 20%, respectively, less per qualified quarter for the same period in 2019 or that fully or partially suspended its operations due to government-imposed restrictions related to COVID-19. For 2021, eligibility can also be made for a quarter based on the gross receipts’ comparison for the previous quarter. As an example, a business may choose to qualify for the first quarter of 2021 based on a comparison of the fourth quarter 2020 gross receipts with the fourth quarter 2019 gross receipts.

Under prior law and IRS guidance, the employer (or any member of its controlled group) was not eligible for the ERC if it received a Paycheck Protection Program (PPP) loan. The new guidance, in accordance with the ARPA, retroactively revokes this limitation. However, limitations on the credit are imposed to the extent wages were used to qualify for forgiveness of a PPP loan.

The maximum credit amounts are:

• For 2020, the lesser of $5,000 or 50% of the first $10,000 of “qualified” wages per employee.
• For 2021, the ARPA increased the credit to the lesser of $7,000 or 70% of the first $10,000 per employee in each quarter of the year not to exceed $28,000 per employee per year.

The definition of “qualified” wages:

• For small employers, wages and expenses paid to qualified health plan expenses for all employees:
  • For qualification in 2020, a small employer is defined as having had 100 or fewer full-time employees in 2019 and 500 or fewer in 2021 to qualify in that year. Full-time employees are defined as those averaging 30 hours of service per week or 130 hours of service per month.
• For large employers, only the wages paid to a qualified health plan on behalf of an employee for periods the employee was not actively employed.

Additionally, the ARPA extended the qualification for credit to colleges, universities, hospitals and entities that provide medical care.

How to claim the employee retention credit for the first half of 2021 (journalofaccountancy.com)

N-2021-23 (irs.gov)

FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service (irs.gov)

Comments

[Ryan Bartholomee]

Eleanor, I apologize for not understanding some of the dates in your original question. I agree that IRS Notice 2021-23 does help here. As I understand the 2021 eligibility and examples (but obviously without knowing all of your specific facts and circumstances), you would be eligible for ERC in Q1 and Q2 of 2021 since the 80% rule is met and the quarter following in which the threshold is no longer met becomes the final quarter of eligibility for ERC.

Per https://www.irs.gov/forms-pubs/employers-may-be-able-to-claim-the-employee-retention-credit-and-have-a-ppp-loan, a key is that "Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both."

An interesting thought from https://blog.aicpa.org/2021/01/plan-for-your-clients-to-get-both-ppp-loans-and-the-erc.html#sthash.UlBwWRSo.dpbs is using as much non-payroll costs as possible in your PPP loan forgiveness. "If sufficient nonpayroll costs are available, limiting payroll costs to the 60% threshold required for full forgiveness may allow the remaining payroll to be eligible for the ERC-provided relief."

Also in https://www.inquirer.com/business/small-business/ppp-employee-retention-tax-credit-forgiveness-payroll-new-program-20210615.html I found that "Many of our clients have found ways to maximize both the ERTC and PPP so that they get to keep 100 percent of PPP funds while applying for ERC credits on other payroll,” so there are businesses working to use both. Also in the article "And most importantly a small business that hasn’t yet taken advantage of the credit for 2020 or 2021 has until April 15, 2025, to go back and amend a prior payroll tax return."

Perhaps your tax professional can provide some useful strategy in your situation to take advantage of 100% PPP loan forgiveness and ERC for Q1 and Q2?

[Eleanor Bennett]

Thank you for your response Ryan Bartholomee. I feel that n-21-23 is more pertinent to my question especially as it relates to 2021 gross receipts on page 7. It appears to state that I can use 2020 4th Qtr and 2021 1st quarter for qualifying gross receipts for both 2021 1st Qtr (not claiming due to PPP loan) and 2nd qtr (qualifies as 1st Qtr was down 46% compared to 1st Qtr 2019). My accountant agrees but it's not extremely clear.

[Ryan Bartholomee]

Eleanor, you will want to check with your tax professional on all of the details specific to your situation, but I found Question 23 and Answer 23 beginning on page 44 to be helpful: https://www.irs.gov/pub/irs-drop/n-21-20.pdf

[Eleanor Bennett]

Our company received a PPP loan in Q1 which is expected to be 100% forgiven. For this reason the ERTC was not taken for Q1 despite gross receipts down 46% compared to 2019. Q-2 shows gross receipt down only 5% compared to 2019. Can I claim the ERTC for Q2 as one of the two quarters met the gross recipt eligibility requirement? I can't find anything that specifically states each quarter must be analyzed by itself? It just states if Q1 or Q2 meet the 80% gross receipt requirement then the company is eligible to claim the ERTC. Any clarification would help enormously.

[Patricia M Wyatt]

Thank you for your inquiry, Mr. Nguyen. Here's is a committee representative's response:

Notice 2021-23 states that it only provides guidance on the credit as enacted under the CARES Act as amended by CAA 2021. On page 2, it specifically states that additional guidance will be provided in the future on the expansion of the credit to the last two quarters of 2021.

https://www.irs.gov/pub/irs-drop/n-21-23.pdf

[Van Nguyen]

I believe, as of April 23, 2021, the maximum credit for 2021 is $14,000 per employee to cover the first two quarters, according to IRS Notice 2021-23.