The American Rescue Plan Act of 2021 (“ARPA”) 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 The ERC was originally enacted in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).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. Under the CARES Act, you could take a PPP loan or claim the ERC, but not both. 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 and the American Rescue Plan Act
The enhanced ERC under ARPA follows the more favorable 2021 rules originally enacted as part of the CAA. These rules include:
- Lowering the threshold for meeting the “eligible employer” standard under the gross receipts test (requiring only a 20% decline in gross receipts compared to a 50% decline required for the 2020 ERC)
- Raising the credit rate to 70% (from 50% in 2020)
- Raising the maximum qualified wages to $10,000 per quarter (from $10,000 aggregate for all of 2020)
- Raising the “small employer” limit to 500 full-time employees (compared to 100 full-time employees for the 2020 ERC)—a small employer is allowed to claim all wages paid during the eligibility period; while large employers can only claim the ERC for wages paid to employees not providing services
As a result, the maximum ERC per employee for 2021 is now $28,000, compared to $5,000 for the 2020 version of the ERC.
Expanded Benefits Under the New Relief Legislation
In addition, ARPA provides additional expanded benefits for the ERC—these two changes are only applicable to the third and fourth calendar quarters of 2021.
First, the ERC is now available for “Recovery Startup Businesses.” This provision is applicable to startup companies that opened a trade or business after February 15, 2020, and have average annual gross receipts that do not exceed $1M. Start-up companies that meet these criteria are eligible to claim the ERC even if they don’t meet the significant decline in gross receipts or suspension of operations tests outlined above. The amount of ERC available per employer under this provision is capped at $50,000 per quarter.
Secondly, ARPA also provides an expanded ERC benefit to “Severely Financially Distressed Employers.” To qualify under this provision, an employer must suffer at least a decline of 90% gross receipts in the quarter compared to the same quarter in 2019. Large employers (over 500 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).
What You Need to Know About New ERC Provisions
Here’s a breakdown of changes to the ERC across 2020 and 2021.
| 2020 | 2021 – Q1 & Q2 | 2021 – Q3 & Q4 | |
|---|---|---|---|
| Time Period | March 13, 2020, to December 31, 2020 | January 1, 2021, to June 30, 2021 (credit computed for each quarter) | July 1, 2021, to December 31, 2021 (credit computed for each quarter) |
| Credit Rate | 50% | 70% | |
| Qualified Wages | Can qualify up to $10,000 per employee | Can qualify up to $10,000 per employee | |
| Maximum Credit per Employee | $5,000 aggregate | $7,000 per quarter | |
| Eligible Small Employer | Less than or equal to 100 full-time employees | Less than or equal to 500 full-time employees | |
| Eligibility Requirements: Decline in Gross Receipts | Gross receipts decline of greater than 50% in any quarter in 2020 vs. 2019 | Gross receipts decline of greater than 20% in any quarter in 2021 vs. 2019 | |
| Lookback Provision for Gross Reciepts | Not applicable | Look back to the preceding quarter to meet qualification criteria | |
| Governmental Instrumentalities Eligible | No | Public colleges, universities, organizations whose principal purpose is providing medical or hospital care, certain federal instrumentalities like credit unions | |
| Recovery Start-up Business | Not Applicable | New category of qualified business that started 2/15/2020 or later and limited to $50,000 in credit per quarter | |
| Severely Financially Distressed Employer | Not Applicable | Gross receipts down over 90% in Q3 or Q4 vs. 2019 and eligible small employer rules ignored | |
| Overlapping Provisions – Don’t Double Dip! | PPP, FFCRA, WOTC, FMLA | PPP, FFCRA, WOTC, FMLA, R&D, Indian Employment, Veterans, Empowerment Zone | PPP, FFCRA, WOTC, FMLA, R&D, Indian Employment, Veterans, Empowerment Zone, SVO Grants, Restaurant Revitalization Grants |
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 is expected to release additional guidance soon to provide additional details on the 2021 ERC.
Let's Talk
The new legislation provides significant changes to the ERC. Wondering how these changes impact your organization?
Stay current on your favorite topics
Learn More
See what more we can bring to organizations just like yours.
Healthcare Critical Access Hospitals Dental Practices Health Systems Medical Practices Senior Living Construction & Real Estate Manufacturing Financial InstitutionsTake a deeper dive into this Insight’s subject matter.
Tax
