The American Rescue Plan Act of 2021 (the Rescue Plan), signed into law recently by President Biden as an extension to COVID-19 relief, extends tax credits available to employers initially created by the CARES Act and extended by the Consolidated Appropriations Act of 2021 (the Appropriations Act), which is intended to help businesses during the pandemic. The employee retention credit (the Credit) is designed to encourage businesses to keep employees on their payroll despite experiencing economic hardship.
Under the CARES Act, the Credit was available to employers from March 13, 2020, to December 31, 2020. The Appropriations Act initially extended the Credit to apply to wages paid from January 2021 through June 2021. The Appropriations Act was set to expire July 1. The Rescue Plan extends the Credit through December 31, 2021.
The Credit is available to employers whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order, or (2) gross receipts for the relevant calendar quarter are less than 50% in 2020, or are less than 80% in 2021, of its gross receipts for the same calendar quarter in 2019. An employer also can elect to determine eligibility by comparing its gross receipts for the immediately preceding calendar quarter to the corresponding 2019 calendar quarter.
The Credit is a refundable payroll tax credit for eligible employers, calculated as a percentage of qualified wages paid to employees.
- The 2020 Credit under the CARES Act is equal to 50% of qualified wages paid to employees between March 13, 2020, and December 31, 2020, up to a maximum of $5,000 in wages per employee per quarter.
- The 2021 Credit under both the Appropriations Act and the Rescue Plan is equal to 70% of qualified wages paid to employees between January 1, 2021, and December 31, 2021, up to a maximum of $10,000 in wages per employee per quarter. Thus, in 2021, the maximum Credit amount available is $7,000 per employee per quarter, for a total of $28,000.
“Qualified Wages” are defined differently under the 2020 and 2021 plans.
- Under the 2020 CARES Act plan, an employer who had fewer than 100 employees in 2019 is eligible for the Credit during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees were working. By contrast, if an employer had more than 100 employees, the qualified wages include only those wages paid to employees who were not working.
- Under the 2021 Appropriations Act and Rescue Plan, an employer who had fewer than 500 employees in 2019 is eligible for the Credit during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees were working. By contrast, if an employer had more than 500 employees, the qualified wages include only those wages paid to employees who were not working.
Note, there is also a set of rules that must be taken into account that aggregates multiple employers if there is common ownership.
In addition to extending the expiration dates, the Rescue Plan makes two key changes to the prior relief plans. First, the Rescue Plan expands eligibility for the Credit to “recovery startup businesses,” (RSP) which is any employer that (a) began business on or after February 15, 2020; (b) has no more than $1,000,000 in average annual gross receipts over the prior three years; and, (c) is not otherwise eligible for the credit because the business was not shut down per a COVID-19 lockdown order and did not have a significant reduction in gross receipts compared to the same quarter in 2019. In other words, if a business meets the definition of an RSP, they are not required to meet the gross receipts test or have been subject to a government shutdown in order to claim the credit. The Credit for RSPs essentially operates as an incentive for the establishment of new businesses. The Credit for an RSP is effective for wages paid between July 1, 2021, and December 31, 2021. The Credit allowed for an RSP is a maximum of $100,000, and no more than $50,000 per quarter.
Second, the Rescue Plan expands the definition of qualified wages for large employers that qualify as “severely financially distressed employers.” A severely financially distressed employer is an eligible employer experiencing gross receipts that are less than 10% of what they were in the same quarter in 2019 (i.e. gross receipts with a reduction of more than 90% as compared to the same quarter in 2019). Severely financially distressed employers can include all wages paid to employees as “qualified wages” rather than only wages paid to employees when they were not working.
The relief plans allow a Credit for wages that were not paid with the proceeds of a PPP loan. Conversely, the Credit is not allowed for wages paid using a PPP loan, a Shuttered Venue Operator Grant, or a Restaurant Revitalization Grant.
Contact a Critchfield attorney with questions about the potential applicability of this relief plan to your business.