The employee retention tax credit made available under the CARES Act was intended to encourage businesses to keep employees on their payroll even when the employer’s business is disrupted in certain manners due to the pandemic. The refundable tax credit was initially established to cover 50 percent of up to $10,000 in qualified wages paid by certain eligible employers whose businesses has been financially impacted by COVID-19 during 2020.
Pursuant to the Consolidated Appropriations Act, 2021 (Appropriations Act), the retention tax credit, which was set to expire at the end of 2020, has been extended for an additional six months (through June 20, 2021). In addition, effective January 1, 2021, the amount of the tax credit is increased to 70 percent (up from the 50 percent threshold included in the CARES Act) of up to $10,000 per calendar quarter (up from $10,000 total for the remainder of 2020) of qualified wages paid to an employee. Based on the changes, the maximum tax credit available for the first half of 2021 is $14,000 per employee ($7,000 per quarter) (up from $5,000 for the entire year).
The CARES Act mandated that in order to be eligible to claim the retention tax credit an employer must either:
- Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter.
The Appropriations Act reduced the threshold necessary to trigger a significant decline in gross receipts from 50 percent to 20 percent. Moreover, while the CARES Act provided gross receipts eligibility ends with the first calendar quarter following after the employer’s gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019, the Appropriations Act introduced a new safe harbor allowing employers to use prior calendar quarter gross receipts (rather than referring back to 2019) to determine eligibility.
The definition of qualified wages eligible for the retention tax credit depends on the number of employees an eligible employer has. Generally large employers can only count wages paid to employees that are not providing services because operations were suspended or due to an eligible decline in gross receipts; conversely, smaller employers can count wages paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services. All affiliated entities are considered a single employer for purposes of determining whether the employer had a significant decline in gross receipts if they are aggregated under the tax rules adopted for this purpose.
The Appropriations Act expanded the more permissive rule applicable to small employers by increasing the employee threshold from 100 to 500 in the number of employees counted when determining the relevant qualified wage base. Thus, for the first two quarters of 2021, an eligible employer with 500 or fewer employees will be eligible for the credit, even if employees are working. Note that the rules remain that when calculating this 500-employee threshold, the employees of all affiliated companies – e.g., those sharing more the 50 percent common ownership in a parent-subsidiary relationship – must be aggregated.
Those companies with more than one affiliated entity should confirm whether and how the 500-employee threshold applies to them.
The Appropriations Act clarified that employers not in business in 2019 (but launched in 2020) can avail themselves of the tax credit as well as certain tax-exempt and governmental employers. In addition, employers who received a Paycheck Protection Program (PPP) loan are now eligible to use the retention tax credit if the requirements of the credit are otherwise met. PPP borrowers may also be retroactively eligible for the tax credit (we expect more guidance from the IRS on claiming the credit retroactively). That said, wages for which the tax credit is claimed may not be counted for purposes of loan forgiveness under the PPP
Overall, those employers who either expected the retention tax credit to sunset OR believed that they were ineligible because of participation in the PPP might revisit if/how they can benefit from the revised retention tax credit.