The American Rescue Plan Act of 2021 (ARPA), signed into law on Thursday, March 11, 2021, provides wide-ranging relief for employers, taxpayers, families, and the unemployed. Included in the $1.9 trillion package is an extension of the Employee Retention Credit (ERC) from June 30, 2021 to December 31, 2021.

Created last March to encourage businesses to keep employees on their payroll through the end of 2020, the ERC allows eligible employers to claim a refundable tax credit for paying qualified wages to their employees. Extended through June 30, 2021 by The Consolidated Appropriations Act, the ERC was further extended through the end of 2021 by the ARPA. ARPA also restructures the credit to be claimed against the employer’s share of Medicare for the second half of 2021 instead of against Social Security taxes, as it was with the prior periods.

In addition to this extension and restructuring, the ERC has been expanded to include:

• “Recovery Startup Business” assistance—eligible employers who began a trade or business after February 15, 2020 but may not have met the original ERC eligibility test are now eligible to receive up to a $50,000 per quarter. Additional guidance for these employers will be provided by the IRS.

• Claim expansion—large employers who qualify as a “severely financially distressed employer” (those who experience greater than a 90% decline in gross receipts in a 2021 quarter compared to the same 2019 quarter) will be eligible to include all employee wages when calculating the ERC rather than being limited to wages paid to employees who were not providing services, as in the original version of the program.
• Claim extension—the IRS statute of limitations to claim the credits enacted through the ARPA has been extended from three years to five years.

Similar to previous Acts, the ARPA clarifies that wages used for other federal grants or programs, such as the Paycheck Protection Program (PPP), Shuttered Venue Operator Grant (SVOG), or Restaurant Revitalization Grant (RRG), cannot be used to claim the ERC. However, it is wise to review the guidelines for all relevant relief programs to ensure that you are receiving maximum federal benefits. As we noted in an earlier post on the relationship between the PPP and the ERC, the inclusion of qualified non-wage expenses in a PPP loan forgiveness application might free up eligible wages for use on the ERC.

Just a reminder, employers filing their 2021 IRS Form 941s and the ERC calculation updates effective January 1, 2021:

• The credit availability has been extended from December 31, 2020 to December 31, 2021.
• The credit percentage is increased from 50% to 70% of qualified wages for 2021. ($10,000 qualified wages x 70% rate = $7,000)
• Separate $10,000 qualified wage caps apply for each quarter of 2021, rather than a single $10,000 cap for the entire year. The maximum ERC for 2021 is $28,000 per employee for the 2021 calendar year, or $7,000 maximum credit per quarter. (For 2020, the maximum ERC was $5,000 per employee for the year (50% of $10,000 qualified wages).
• Any employer with a reduction in gross receipts of 20% for 2021 (the original threshold was 50%) can take advantage of the ERC and, for purposes of calculating the reduction in gross receipts, an employer can use its prior-quarter gross receipts compared to the corresponding 2019 quarter to determine eligibility. (No formal election is required. The employer should verify this election within their internal documentation.)
• The threshold of 100 full-time equivalent (FTE) employee is increased to 500 FTE employees for the period from January 1, 2021 to December 31, 2021. (Previously, the ERC applied to all employee wages paid by an employer with 100 or fewer employees, while employers with more than 100 employees could only include wages paid to employees not performing services due to the business suspension or significant decline in gross receipts.)
• Qualified wages for purposes of the ERC originally could not exceed the amount an employee would have been paid for working an equivalent number of hours during the 30 days immediately preceding the applicable period. This restriction is eliminated for 2021 wages, allowing employees to include bonus pay or severance as qualified wages.
• Employer paid group health care cost may be treated as qualified wages even if the employee did not receive any “regular” wages during the same period.

As always, you can reach out to our tax professionals for assistance in navigating the complexities of the COVID-19 relief efforts.

Our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to help navigate this credit for your business and can be reached at SALT@gmco.com.