Many state and local governments are rightfully focusing on the $360 billion in direct funding for nearly every government contained in the $1.9 Trillion American Rescue Plan Act of 2021 (ARPA).
This legislation contains recovery rebates, enhanced unemployment benefits and credits for providing paid sick and family leave. Some state (and certain local) tax codes may need to be amended.
The ERC and the American Rescue Plan Act
The ARPA also extends and expands the Employee Retention Credit (ERC) through December 31, 2021. The ERC was originally enacted in March of 2020 as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The Consolidated Appropriations Act of 2021 (CAA) previously extended and enhanced the ERC, most notably by retroactively allowing employers to claim the ERC even if they took a PPP loan and extending the ERC to public colleges and universities, as well as government instrumentalities providing medical or hospital care. This may qualify your government-affiliated business for this valuable credit.
Eligibility for the ERC is based on a significant decline in gross receipts (further explained below), or fully or partially suspended operations due to a government order related to COVID-19.
The ERC is applicable for each quarter of 2021. Public colleges, universities and organizations whose principal purpose is providing medical or hospital care would be eligible to potentially receive this credit.
The ARPA provides an expanded ERC benefit to “Severely Financially Distressed Employers” for the third and fourth calendar quarters of 2021. To qualify under this provision, an employer must suffer a decline of more than 90% gross receipts in the calendar quarter compared to the same calendar quarter in 2019. All employers, not just those with 500 or fewer full time employees, that meet this threshold are eligible to claim the ERC for all wages paid (not limited to wages being paid when no services are being provided) up to the $10,000 maximum.
Potential Scenario for a Public College to Claim the ERC
A public college with 400 full-time employees suffers a greater than 20% decline in revenue for every calendar quarter of 2021 compared to 2019. If all the employees of the college are paid a minimum of $10,000 per quarter, an employee retention credit of up to $7,000 per quarter per employee may be available for 2021.
Process for Governments Claiming the ERC
The fact that the government affiliated college or hospital does not pay income taxes does not prevent it from benefiting from the ERC. The ERC is claimed by reducing payments that would otherwise accompany the quarterly payroll tax return. If the credit exceeds the amount otherwise due with that return, procedures are provided for the excess to be received as a cash payment.
More Guidance Still to Come on the Employee Retention Credit
The ERC enhancements follow the recently released IRS Notice 2021-20 that provided formal guidance for the 2020 ERC, including the interaction between wages used for PPP forgiveness and the ERC. The IRS also released guidance for the first and second quarters of 2021 in Notice 2021-23. Further guidance is expected for the final two quarters of 2021.
Learn more about the expansion and extension of the ERC and what it means for your organization.
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