In December, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) modified the Employee Retention Credit (ERC) and extended the period to the first and second quarter of 2021. Then in the American Rescue Plan Act of 2021 (ARPA), it was extended to the third and fourth quarters of 2021.

On Friday, the IRS issued Notice 2021-23, which explains the changes from the ERC to the first two calendar quarters of 2021. The guidance includes the following:

  • increases the maximum credit from $5,000 of qualified wages to $7,000 per employee per quarter in the first and second quarter of 2021;
  • expands the category of employers who may be eligible to claim the credit to include a governmental entity that is a college or university or whose principal purpose is to provide medical care;
  • modifies the gross receipts test to be based on a more than 20% decline in gross receipts from the same quarter in 2019. New employers that did not exist in 2019 can substitute 2020 for 2019 in their determination of the decrease;
  • creates an election to use an alternative gross receipts valuation period. This allows an employer to compare the gross receipts for the immediately preceding calendar quarter with those for the corresponding 2019 quarter. This election is made by claiming the credit and maintaining documentation of the method and support;
  • the definition of a large employer increased from 100 to 500 full-time employees in 2019. The aggregation rules are still in place and unchanged;
  • removes the large employer limitation, that disallowed  wages that exceed  the average amount an employee was paid during the 30 days preceding the shutdown;
  • provides guidance on determining average quarterly wages in 2021 for seasonal employers and for employers that were not in existence in 2019;
  • restricts the ability to claim an advanced payment of the credit on Form 7200 to small employers and 70% of the average 2019 quarterly wages. Payroll tax deposits should be reduced in anticipation of receiving the credit before requesting an advance.

The IRS has already issued a clarification to the 2020 ERC credit in Notice 2021-20 and noted additional guidance would be provided for ARPA’s expansion to the third and fourth quarters in 2021.

Your BMF Advisor can help you determine the applicability of your unique situation. Contact us if you have questions about these changes or how your tax status could be affected.

About the Authors

John E. Jenkins
CPA
Partner, Taxation Services
Melissa G. Dunham
CPA, MTax, MBA
Senior Manager, Taxation Services

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