In late December, the Consolidated Appropriations Act, 2021, was passed and signed into law. The new law includes various updates and changes to the previous COVID-19 relief legislation. Specifically, it adds clarity and expands the employee retention credit that was created by the CARES Act. Here is a summary of the key provisions of the credit, comparing the language included in the previous CARES Act, and what is now included in the new Consolidated Appropriations Act.
Time Period Credit is Available
CARES Act
The credit is offered for qualified wages paid after March 12, 2020, and before January 1, 2021.
Consolidated Appropriations Act, 2021
The credit is offered for qualified wages paid after March 12, 2020, and before July 1, 2021 (now available in the first two quarters of 2021).
Eligibility Requirements
CARES Act
The credit was only available for businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or gross receipts were less than 50% of gross receipts for the same quarter in 2019, until such quarter as gross receipts are 80% of same quarter in 2019. Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.
Consolidated Appropriations Act, 2021
Beginning January 1, 2021, the credit will be available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or gross receipts are less than 80% of gross receipts for the same quarter in 2019. Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit.
Percentage of Wages
CARES Act
The credit was 50% of the qualified wages paid to an employee, plus the cost to continue providing health benefits to the employee.
Consolidated Appropriations Act, 2021
Beginning January 1, 2021, the credit is 70% of qualified wages, plus the cost to continue providing health benefits to the employee.
Maximum Credit Amount
CARES Act
The maximum amount had an annual cap of $5,000 per employee ($10,000 in qualified wages x 50%).
Consolidated Appropriations Act, 2021
Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages x 70%) for a possible $14,000 credit per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.
Employer Size for Whether an Employee is Working or Not
CARES Act
A company with more than 100 employees could not take the credit for wages paid to an employee performing services for the employer (either teleworking, or working at the workplace, even at reduced capacity due to reduction in business). A company with 100 or fewer employees was eligible for the credit, even if the employee was working.
Consolidated Appropriations Act, 2021
Beginning January 1, 2021, the threshold increases to 500. An employer with 500 or fewer employees will be eligible for the credit, even if employees are working. When calculating the 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated.
PPP Loan Interplay
CARES Act
This section was repealed. A company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit. This disallowance rule was extended to all affiliated companies that shared common ownership, so that if one of the companies received a PPP loan, any other company with more than 50% common ownership was unable to claim the credit.
Consolidated Appropriations Act, 2021
This is a retroactive change to the effective date under the original law for wages paid after March 12, 2020. A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit. The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. A company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively. The IRS is expected to issue guidance on how to claim the credit retroactively. Companies related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively if they are otherwise eligible for the credit.
Advance Payments
CARES Act
In 2020, there was no provision added to the CARES Act to receive the credit in advance, before qualified wages were paid.
Consolidated Appropriations Act, 2021
The IRS is expected to draft guidance that allows an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess.
Limitation on Hazard Pay
CARES Act
The credit was unavailable for pay rate increases.
Consolidated Appropriations Act, 2021
Under the new law, the credit is allowed for hazardous duty pay increases.
Unavailability of Credit for Governmental Entities
CARES Act
The employee retention credit was not available to any federal, state, or local governments, or any agency or instrumentality thereof.
Consolidated Appropriations Act, 2021
Effective January 1, 2021, there are certain entities that are now eligible for the credit including:
- Public colleges or universities
- Organizations whose principal purpose is providing medical or hospital care
- Certain Federal instrumentalities, such as federal credit unions
Definition of Gross Receipts for Tax Exempt Entities
CARES Act
There was no definition provided of gross receipts for tax exempt entities.
Consolidated Appropriations Act, 2021
The new legislation defines gross receipts for tax exempt entities by reference to Section 6033 of the Internal Revenue Code.
Gross receipts include the following: contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income (e.g., interest, dividends, rents, and royalties).
Gross receipts are not reduced for any associated costs or expenses.
There is still a lot of information to unpack as it relates to the new Consolidated Appropriations Act, 2021. BerganKDV will continue to monitor the situation as more legislation updates and IRS guidance continues to unfold. If you have any questions regarding the new law and how it may impact you, please contact your trusted advisor or start here.
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