The Consolidated Appropriations Act, 2021 changes key provisions of the CARES Act employee retention credit and expands applicability.
Key insights
- The employee retention credit applies more broadly as a result of changes made by the Consolidated Appropriations Act, 2021.
- The majority of the changes are effective as of January 1, 2021, and impact the first two quarters of the year.
- Note this key retroactive change: employers who took PPP loans are now eligible to take the employee retention credit, so long as the same wages are not used for both.
Need help navigating employee retention credit scenarios?
The Consolidated Appropriations Act, 2021, was signed into law on December 27, 2020. Among many changes and updates to the prior relief legislation for COVID-19, this law clarifies and expands the employee retention credit that was created by the CARES Act.
Below is a summary of key provisions of the credit, comparing the original and the new law.
| CARES Act | Consolidated Appropriations Act, 2021 | |
|---|---|---|
| Time Period Credit is Available | Qualified wages paid after March 12, 2020, and before January 1, 2021. | Qualified wages paid after March 12, 2020, and before July 1, 2021 (now available in the first two quarters of 2021). |
| Eligibility Requirements |
Businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or Gross receipts were less than 50% of gross receipts for the same quarter in 2019 until such quarter as gross receipts are 80% of same quarter in 2019. Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit. |
Beginning January 1, 2021, the credit will be available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or Gross receipts are less than 80% of gross receipts for the same quarter in 2019. Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit. |
| Percentage of Wages | The credit was 50% of the qualified wages paid to an employee, plus the cost to continue providing health benefits to the employee. | Beginning January 1, 2021, the credit is 70% of qualified wages, plus the cost to continue providing health benefits to the employee. |
| Maximum Credit Amount | Annual cap of $5,000 per employee ($10,000 in qualified wages x 50%). |
Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages x 70%) for a possible $14,000 credit per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020. |
| Employer Size for Whether an Employee is Working or Not: |
A company with more than 100 employees could not take the credit for wages paid to an employee performing services for the employer (either teleworking, or working at the workplace, even though at reduced capacity due to reduction in business). A company with 100 or fewer employees was eligible for the credit, even if the employee was working. |
Beginning January 1, 2021, the threshold increases to 500. An employer with 500 or fewer employees will be eligible for the credit, even if employees are working. When calculating the 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated. |
| PPP Loan Interplay |
REPEALED – A company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit. This disallowance rule extended to all affiliated companies that shared common ownership, so that if one company received a PPP loan, any other company with more than 50% common ownership was ineligible to claim the credit. |
This change is retroactive to the effective date under the original law for wages paid after March 12, 2020. A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit. The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. A company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively. The IRS is expected to issue guidance on how to claim the credit retroactively. Companies related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively, if they are otherwise eligible for the credit. |
| Advance Payments | In 2020, there was no provision to receive the credit before qualified wages were paid. |
The IRS is expected to draft guidance to allow an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess. |
| Limitation on Hazard Pay | No credit for pay rate increases. | Under the new law, the credit is allowed for hazardous duty pay increases. |
| Disallowance of Credit for Governmental Entities | The employee retention credit was not available to any federal, state, or local governments, or any agency or instrumentality thereof. |
Effective January 1, 2021, the following entities are eligible for the credit:
|
| Definition of Gross Receipts for Tax Exempt Entities | No definition of gross receipts as applicable to tax exempt entities was included. |
The new law defines gross receipts for tax exempt entities by reference to Section 6033 of the Internal Revenue Code. Gross receipts include the following: contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income (e.g., interest, dividends, rents, and royalties). Gross receipts are not reduced for any associated costs or expenses. |
How we can help
There are still many questions to be answered with regard to updated forms and filing instructions. For help, work with your advisor or contact CLA.