Employee Retention Credit Modifications Under the American Rescue Plan

Our previous advisors touched on additional clarifications and how to claim the Employee Retention Credit (ERC). With the recent American Rescue Plan Act of 2021 (ARPA), the ERC has been extended and additional key changes made. The modified ERC, which begins July 1, 2021, applies to wages paid after June 30, 2021, and before January 1, 2022. The credit is still limited to 70% of $10,000 in qualified wages for each employee for each calendar quarter.

Eligibility

A qualified employer is eligible to claim the ERC if it experiences a 20% decline in gross receipts or a full or partial suspension of business due to a governmental order. Employers with up to 500 full-time employees can claim the credit for all employees, but employers with over 500 full-time employees may only claim the ERC for employees paid not to work.

Key Changes

• A recovery start-up business may qualify even if it did not have a suspension of business or a reduction in gross receipts. A business that began operating after February 15, 2020, and meets certain gross receipts requirements could be eligible for a maximum credit of $50,000 per calendar quarter.
• A severely financially distressed large employer whose quarterly gross receipts declined 90% or more from 2019 will be able to treat all wages up to the $10,000 per employee limitation paid during those quarters as qualified wages.
• The ERC is limited to the quarterly applicable employment taxes. Applicable employment taxes are the employer’s share of Medicare (1.45%) taxes. This changed from the employer’s Social Security (6.2%) tax in the first two quarters of 2021. The intent is to increase the number of cash refunds to taxpayers. It is likely taxpayers will need to file Form 7200 for advance payments of employer credits.
• The statute of limitations for assessments relating to the ERC will not expire until five years after the date that the original return claiming the credit is filed.

Definitions

• Qualified wages are defined as wages and payments to a group health plan to the extent it is not included in wages. In general, this includes all amounts paid to an employee for their services and contributions to an employer’s qualified health plan.
• Qualified wages not eligible for ERC include wages considered under the second-draw PPP loans, shuttered venues assistance and restaurant revitalization grants.
• Recovery start-up business is an employer that began operating after February 15, 2020, and has average annual gross receipts not exceeding $1,000,000 and otherwise does not meet the ERC eligibility tests.

Documents to Maintain

• Documentation to show how the employer determined it was an eligible employer, including:
  • any governmental order to suspend the employer’s business operations;
  • any records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its business operations;
  • any records the employer used to determine it had experienced a significant decline in gross receipts;
  • any records of which employees received qualified wages and the amounts; and
  • in the case of a large eligible employer, work records and documentation showing that wages were paid for time an employee was not providing services.
• Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
• Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.

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.