On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR Act) amended the Employee Retention Credit (ERC) provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other changes, the ERC is now available from January 1, 2021 to June 30, 2021. Below is a description of the ERC available under the CARES Act and a list of the changes currently in effect under the law. TCDTR.
ERC under the CARES Act
The ERC under the CARES Act has granted eligible employers a refundable credit on the employer’s portion of social security tax based on the amount of eligible wages paid to employees between March 13 and December 31, 2020. Eligible employers included those who were required to pay fully or partially suspend operations due to the COVID-19 pandemic, or who had a significant drop in gross receipts. A significant drop included gross revenue which was less than 50% of gross revenue for the same quarter of the previous year, until gross revenue exceeded 80% of gross revenue for the same quarter of the previous year.
“Eligible salaries” included those paid to employees who fail to provide services due to a drop in gross revenue or a suspension from the business. For employers with 100 or fewer employees, all of these salaries are eligible, and for employers with 100 or more employees, eligible salaries cannot exceed the amount the employee would receive for working an equivalent time during the 30 days. preceding the period of suspension of activity or decline in gross revenues. Eligible salaries also did not include paid COVID-19 sick leave and amounts that employees are required to provide under the Families First Coronavirus Response Act. Eligible salaries, however, included eligible health insurance plan expenses paid by the employer to maintain a group health insurance plan and which are excluded from gross employee income.
Under the CARES Act, the amount of ERC was equal to 50% of the eligible salary for each employee, with a limit of $ 10,000 of salary per employee. In addition, government employers were not eligible for the ERC.
Amendments to the TCDTR law
The TCDTR Act amended and extended the rules of the ERC under the CARES Act. Here is a list of the modifications enacted by the TCDTR law:
- Increases the ERC rate per employee from 50% to 70% of the eligible salary;
- Expands eligibility by reducing required year-over-year gross revenue decline from 50% to 20% of previous year’s revenue and creates a safe harbor for employers to use quarterly gross revenue precedent to determine eligibility;
- Increases the salary limit per employee from $ 10,000 for the year to $ 10,000 for each quarter;
- Increase the 100 employee line to determine the relevant qualified salary base for employers with 500 or fewer employees;
- Allows certain public bodies to claim ERC, including colleges and universities, those primarily engaged in medical / hospital care, and tax-exempt corporations organized as an instrument of the United States;
- Removes the 30-day wage limitation for large employers, allowing employers, for example, to claim ERC for essential employee bonuses;
- Allows companies with 500 or fewer employees to advance ERC at any time during the quarter based on salaries paid in the same quarter of a previous year;
- Allows employers who did not yet exist for all or part of 2019 to claim the credit based on the corresponding quarter in 2020; and
- Provides for a small business public awareness campaign regarding the availability of the ERC to be conducted by the Secretary of the Treasury in coordination with the administrator of the Small Business Administration.
In addition, retroactive to the date of entry into force of article 2301 of the CARES law, the TCDTR law specifies that the determination of gross revenue for certain tax-exempt organizations includes all gross revenue, not just revenue. gross from unrelated companies; clarifies that group health plan expenses may be considered eligible salaries even when no other salary is paid to the employee, in accordance with IRS guidelines; and provides that employers who receive Paycheck Protection Program (P3P) loans may still be eligible for ERC with respect to wages that are not paid with canceled P3 products. According to the IRS, if an employer received a PPP loan and included salary payments for the second or third quarter of 2020 as costs on a PPP loan cancellation request and the cancellation denied, employers can claim the ERC for these qualified wages on the fourth quarter of 2020 on Form 941. Since the filing date for that Form 941 has now passed, the IRS also indicates that employers can file a Form 941-X modified to take advantage of the ERC and obtain a refund.
The IRS plans to issue more guidance on updates to the TCDTR versus the CARES Act, particularly with respect to measuring declining gross revenue using the previous quarters of 2020 and 2021. In addition, we are still awaiting guidance regarding the interaction between PPP loan forgiveness and ERC. Although the IRS clarified that the ERC can be used for PPP loan amounts that are not canceled, it did not clarify whether this would apply to partially canceled PPP loans or loan cancellation requests. PPPs that have been canceled by the employer. We also expect the IRS to update its FAQs to reflect ERC changes. For more information on the ERC under the CARES Act, please see this M&S publication.
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