On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act (the “Act”) which includes a $900 billion economic stimulus package intended to provide additional relief for the ongoing pandemic. As part of this stimulus package, the Act expands the employee retention tax credit that was originally included for 2020 in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into the first two quarters of 2021 with significant changes as described below that increase the credit and make the credit available to more employers, and the Act makes technical corrections to the credit provisions in the CARES Act as summarized below (our summary of the employee retention tax credit as included in the CARES Act can be found here).
Employee Retention Tax Credit for January 1, 2021, through June 30, 2021
The Act expands the refundable “employee retention credit” from the CARES Act for the first two quarters of 2021 for employers whose business was fully or partially suspended as a result of COVID-19, or who have a significant decline in gross receipts, to encourage continued payment of employee wages and continued coverage under employer sponsored health plans. The refundable credit in the Act generally equals 70% (it was 50% in the CARES Act) of each employee’s “qualified wages” paid on or after January 1, 2021, through June 30, 2021. As discussed below, whether wages constitute “qualified wages” is determined on a quarterly basis; the maximum amount of qualified wages taken into account for any employee for each quarter in 2021 is $10,000; as a result, the maximum credit per employee is $7,000 per quarter (rather than annual limits as contained in the CARES Act for 2020).
The employee retention credit is a credit against applicable employer payroll taxes and is limited to the employer’s employment taxes, reduced by certain other credits; to the extent that the amount of the qualified wages exceeds the amount of payroll taxes for any quarter, such excess amount is treated as an overpayment and is refunded to the employer. For Small Employers (as defined below), the Act provides that the credit can be advanced each quarter in an amount not to exceed 70% of the average wages paid by the employer for the corresponding quarter in calendar year 2019 (any excess amount advanced must be repaid). There are special rules for Small Employers with seasonal workers for calculating the amount of the advance.
An eligible employer is an employer carrying on a trade or business during the calendar quarter in 2021 that meets one of the following criteria with respect to such calendar quarter:
- The employer’s trade or business is fully or partially suspended during such quarter due to government orders limiting commerce, travel, or group meetings due to COVID-19.
- The employer’s gross receipts during one of the first two quarters in 2021 are less than 80% of those for the same calendar quarter in the 2019. The Act contains a new rule that permits employers to also choose to use the last preceding quarter for purposes of this comparison as well.
Tax-exempt organizations also qualify and certain governmental entities qualify for the credit under the Act. Under the CARES Act, the federal government, state governments and any political subdivisions (e.g., local and city governments), and their related agencies and instrumentalities were not eligible employers, but the Act permits the credit to be taken by any organization described in section 501(c)(1) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code, or a governmental entity that is a college or university, or the principal purpose or function of such entity is providing medical or hospital care.
The definition of “qualified wages” depends on the size of the employer, determined on a controlled group basis, and in each case, is limited to $10,000 per quarter in 2021 per employee. For employers that had 500 or fewer full-time employees in 2019 (a “Small Employer”), “qualified wages” includes all wages and compensation paid by the eligible employer during the applicable period up to the limit described above (i.e., a period during which business is suspended as a result of a government order due to COVID-19 or a calendar quarter that meets the reduction in gross receipts test). For organizations that had more than 500 full-time employees in 2019 (a “Large Employer”), “qualified wages” include only wages and compensation paid to employees who are not providing services due to the reasons making the employer eligible for this credit (i.e., either as a result of a suspension of business pursuant to a governmental order due to COVID-19 or a reduction in gross receipts) (please note that such wages are no longer restricted under the Act to what would be considered typical wages for the 30 days immediately preceding such period as required in the CARES Act). The Affordable Care Act definition of “full-time employee” (generally, an employee employed, on average, for at least 30 hours of service per week, or 130 hours of service per month) applies. The definition of Small Employer was greatly expanded from the definition in the CARES Act by increasing the number from 100 to 500 as described above which will greatly increase the number of employers that qualify for more credit as a Small Employer rather than being subject to the limitations of qualified wages for a Large Employer.
In each case, “qualified wages” includes not only wages (as defined in Section 3121(a) of the Code) and compensation (as defined in Section 3231(e) of the Code), but also all amounts paid by the employer for the employee’s group health plan coverage, provided those amounts are excluded from income under Section 106(a) of the Code.
Retroactive Changes to the Employee Retention Tax Credit for 2020
Under the CARES Act, employers receiving small business loans under Section 1102 of the CARES Act were not eligible employers for the employee retention tax credit at all. Because the rules for employee retention credits are applied on a controlled group basis, using 50% as the standard for ownership for the controlled group analysis rather than the 80% standard that is often used for controlled groups of corporations or trades or businesses, this provision effectively excluded any employers from taking the credit if any other entity in its controlled group had taken a PPP loan. Additionally, this prohibition on taking the credit if any related company had taken a PPP loan created many difficult questions in corporate deals where an entity on one side of the deal had taken a PPP loan and an entity on the other side had taken the tax credit. Luckily, the Act clarifies this issue retroactively with the changes applying both for the credit in the CARES Act for 2020 and for the credit in the Act described above for 2021. The Act clarifies that employers receiving small business loans under Section 1102 of the CARES Act are no longer prohibited from being eligible employers for the employee retention tax credit; provided, that qualified wages do not include any wages that were paid by proceeds of a PPP loan that were forgiven (i.e., the same employer cannot claim the benefit of PPP loan and the tax credit for the same wages). Because this change is retroactive, it is possible that some employers that took a PPP loan and did not take the credit in 2020 may be able to now claim the credit with respect to wages that were not paid by proceeds of a PPP loan that were forgiven.