This article was updated on April 28, 2021.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided an opportunity for employers to generate a refundable tax credit used to offset their employment taxes and apply for a refund for any excess credit generated through December 31, 2020.
The COVID-19-related Tax Relief Act of 2020, as included in the Consolidated Appropriations Act, 2021, which was enacted in December 2020, further extended the Employee Retention Tax Credit (ERTC) through June 30, 2021, and included certain enhancements that apply starting January 1, 2021. In March 2021, the American Rescue Plan Act (ARPA) was signed by President Biden and further extended the ERTC through the end of 2021.
Below are details on how employers could qualify and the eligibility requirements during qualified quarters between March 13, 2020, and December 31, 2021.
Credit Eligibility and Guidelines
Changes in the ARPA of 2021
The ARPA includes revisions to the ERTC that apply exclusively to the third and fourth quarters of 2021. One change, for example, specifies that the credit will be applied against an employer’s share of Medicare taxes instead of Social Security taxes, while excess credits will remain refundable.
Recovery Start-Up Business
The ARPA establishes a new option for eligibility, widening the number of employers who can qualify for the ERTC to include so-called recovery start-up businesses.
A recovery start-up business generally is an employer that:
- Started operating after February 15, 2020, and
- Has average annual gross receipts of less than or equal to $1 million
Employers that meet this definition may claim the credit without suspended operations or a reduction in gross receipts. However, the refund amount is limited to $50,000 total per employer, per quarter.
Additional Relief for Severely Financially Distressed Employers
The ARPA provides another relief opportunity for “severely financially distressed employers,” which are defined as those that have less than 10% of gross receipts for 2021 when compared to the same quarter in 2019. Qualifying employers, regardless of size, can count any wages paid to an employee during any qualified calendar quarter as qualified wages.
Guidance on “Partial Suspension of Operations”
The IRS previously stated that “more than a nominal portion” of operations had to have been suspended for an employer to qualify as having their operations partially suspended due to a COVID-19-related government order. However, there was no guidance issued to help employers determine what a “more than nominal portion” meant or how to measure it.
The IRS has since issued further ERTC guidance, specific to 2020, in Notice 2021-20. The notice states that an employer’s suspended operations meet the “more than nominal” definition to qualify for the ERTC when any of the following are true:
- Gross receipts from the suspended operations comprise at least 10% of total gross receipts,
- Hours of service performed by employees in the suspended operations account for at least 10% of total service hours, or
- Changes to operations result in a reduction of at least 10% of the employer’s ability to provide goods or services
Paycheck Protection Plan Loan and ERTC
The Tax Relief Act of 2020 retroactively waived the exception for Paycheck Protection Program (PPP) loan recipients to also claim the ERTC.
A business or affiliates of a business who received a PPP loan may go back and claim the ERTC to the extent the business was experiencing a partial suspension of operations—or if they met the 50% reduction in gross receipts test—for the eligible calendar quarters in 2020.
PPP recipients may also qualify during the eligible 2021 quarters if they continue to experience a partial suspension of operations or meet the 20% reduction in gross receipts test.
Qualified wages for the ERTC don’t include wages paid from forgiven PPP proceeds.
Retroactively Claim the ERTC
Employers who didn’t claim the ERTC on their originally filed IRS Forms 941 may retroactively claim the credits using the IRS Forms 941-X.
The same wages used to calculate the ERTC can’t be used to calculate other credits, such as the Work Opportunity Tax Credit, Employer Paid Family and Medical Leave Credit (IRC 45S), or other disaster retention credits. Additionally, qualified wages don’t include wages paid from certain grants under the Small Business Association or from the new restaurant revitalization grant.
Employers have three years from the date the original return was filed, or two years from the date the taxes were paid, to file an IRS Form 941-X.
We’re Here to Help
If you have questions about these credits or would like assistance in determining if your business is eligible, calculating the credit and, or claiming the credit, please contact your Moss Adams professional. We also offer a web-based screening tool, MaxCredits®, which can help you reduce the administrative burden of pursuing credits.