[US] Businesses affected by pandemic in 2020/21 can still claim tax credits

While many businesses have already taken advantage of the opportunities available to them under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent COVID‑19 relief legislation, there are still financial benefits to be had. JD Supra details the support that may still be available.

Specifically, businesses may be eligible for the Employee Retention Credit (ERC), a refundable payroll tax credit available in 2020 and 2021 for employers whose operations were fully or partially suspended because of a COVID‑19‑related government order, that had certain revenue losses compared to 2019, or that are "recovery startup businesses" that began operations after February 15, 2020. 

The ERC rules were expanded and liberalised from 2020 to 2021, so employers that might not have benefited under the original 2020 rules could be eligible in 2021.

Employers that have not claimed the ERC but are eligible to do so can file amended payroll tax returns. The deadline to file these returns is April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC.

Key ERC Rules

Businesses That Received PPP Loans May Be Eligible. Originally, under the CARES Act, a business that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC at all. Subsequent COVID-19 legislation retroactively eliminated this rule; however, the ERC still cannot be claimed for the same wages an employer claimed for PPP loan forgiveness (i.e., no "double-dipping").

Eligibility Requirements. For both 2020 and 2021, an employer is eligible for the ERC if its operations were either fully or partially suspended by a COVID-19 government order. In addition, for 2020, a business is eligible for the ERC if it experienced a 50 per cent quarter‑over‑quarter decline in revenue compared to the same quarter in 2019. For 2021, the revenue decline criterion was loosened to a 20 per cent quarter‑over‑quarter decline compared to the same quarter in 2019.

Increased Credit Amount for 2021. One of the most beneficial changes from 2020 to 2021 is the amount of the ERC. Under the CARES Act, the ERC was capped at $5,000 per employee for all of 2020 (a maximum of $10,000 in qualified wages for each employee times a 50 per cent tax credit rate). However, for 2021, the maximum per-employee credit amount is equal to $7,000 per eligible quarter ($10,000 in qualified wages per quarter times a 70 per cent credit rate). Congress eliminated the ERC for most businesses after the third quarter of 2021, so the maximum credit for 2021 is generally $21,000 per employee.

Credit for Wages Paid to Working Employees. Another liberalisation in 2021 concerned the availability of the credit for wages of working employees. In 2020, an employer with more than 100 full-time equivalent employees in 2019 could claim the ERC only for wages paid to employees who, because of COVID‑19, were not working or were working a reduced schedule without a corresponding reduction in wages. For 2021, this limit on the credit for wages of working employees applies only to businesses with 500 or more full-time equivalent employees. Thus, an employer with no more than 500 full‑time equivalent employees can claim the credit for wages paid to employees who continued working.

Special Rules for Recovery Startup Businesses. For the third and fourth quarters of 2021 only, an employer that does not qualify under either of the two general ERC eligibility tests is nevertheless eligible for the ERC if the employer is a "recovery startup business." A "recovery startup business" is a business that (i) does not qualify under the full or partial suspension test or the gross receipts decline test; (ii) began operations after February 15, 2020; and (iii) had average annualised gross revenues for full or partial taxable years preceding June 30, 2021 of no more than $1,000,000. For a recovery startup business, the maximum credit amount for all employee wages is capped at $50,000 per quarter, or $100,000 total for 2021.

Wages Eligible for the ERC. Wages eligible for the ERC include an employee's regular salary, as well as the employee's share of health benefits paid by the employer.

Deduction Disallowance and Amended Income Tax Returns. No deduction is allowed for wages reimbursed by the ERC. For example, if an employer paid $10,000 in qualified wages to an employee and received a credit of $7,000, the employer may deduct only $3,000 of wages. Under current IRS guidance, an employer that deducted wages in a tax year and later claimed the ERC for those same wages should file an amended federal income tax return to correct any overstated deduction.

Application of Aggregation Rules. Members of controlled or affiliated service groups under Section 52(a) or (b) or Section 414(m) or (o) of the Internal Revenue Code are treated as a single employer for purposes of the ERC. For instance, multiple entities with common ownership could be aggregated for purposes of the 500-employee threshold, or for purposes of determining eligibility as a "recovery startup business." For example, if the owners of an existing business established a new business after February 15, 2020, with substantially similar ownership, the new business likely would not be eligible as a "recovery startup business." In addition, multiple entities with common ownership could be aggregated for eligibility purposes. If one entity in the group is eligible based on a COVID-19-related government order, all entities in the group, even those not subject to restrictions, could be eligible.

While many businesses have already taken advantage of the opportunities available to them under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent COVID‑19 relief legislation, there are still financial benefits to be had. JD Supra details the support that may still be available.

Specifically, businesses may be eligible for the Employee Retention Credit (ERC), a refundable payroll tax credit available in 2020 and 2021 for employers whose operations were fully or partially suspended because of a COVID‑19‑related government order, that had certain revenue losses compared to 2019, or that are "recovery startup businesses" that began operations after February 15, 2020. 

The ERC rules were expanded and liberalised from 2020 to 2021, so employers that might not have benefited under the original 2020 rules could be eligible in 2021.

Employers that have not claimed the ERC but are eligible to do so can file amended payroll tax returns. The deadline to file these returns is April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC.

Key ERC Rules

Businesses That Received PPP Loans May Be Eligible. Originally, under the CARES Act, a business that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC at all. Subsequent COVID-19 legislation retroactively eliminated this rule; however, the ERC still cannot be claimed for the same wages an employer claimed for PPP loan forgiveness (i.e., no "double-dipping").

Eligibility Requirements. For both 2020 and 2021, an employer is eligible for the ERC if its operations were either fully or partially suspended by a COVID-19 government order. In addition, for 2020, a business is eligible for the ERC if it experienced a 50 per cent quarter‑over‑quarter decline in revenue compared to the same quarter in 2019. For 2021, the revenue decline criterion was loosened to a 20 per cent quarter‑over‑quarter decline compared to the same quarter in 2019.

Increased Credit Amount for 2021. One of the most beneficial changes from 2020 to 2021 is the amount of the ERC. Under the CARES Act, the ERC was capped at $5,000 per employee for all of 2020 (a maximum of $10,000 in qualified wages for each employee times a 50 per cent tax credit rate). However, for 2021, the maximum per-employee credit amount is equal to $7,000 per eligible quarter ($10,000 in qualified wages per quarter times a 70 per cent credit rate). Congress eliminated the ERC for most businesses after the third quarter of 2021, so the maximum credit for 2021 is generally $21,000 per employee.

Credit for Wages Paid to Working Employees. Another liberalisation in 2021 concerned the availability of the credit for wages of working employees. In 2020, an employer with more than 100 full-time equivalent employees in 2019 could claim the ERC only for wages paid to employees who, because of COVID‑19, were not working or were working a reduced schedule without a corresponding reduction in wages. For 2021, this limit on the credit for wages of working employees applies only to businesses with 500 or more full-time equivalent employees. Thus, an employer with no more than 500 full‑time equivalent employees can claim the credit for wages paid to employees who continued working.

Special Rules for Recovery Startup Businesses. For the third and fourth quarters of 2021 only, an employer that does not qualify under either of the two general ERC eligibility tests is nevertheless eligible for the ERC if the employer is a "recovery startup business." A "recovery startup business" is a business that (i) does not qualify under the full or partial suspension test or the gross receipts decline test; (ii) began operations after February 15, 2020; and (iii) had average annualised gross revenues for full or partial taxable years preceding June 30, 2021 of no more than $1,000,000. For a recovery startup business, the maximum credit amount for all employee wages is capped at $50,000 per quarter, or $100,000 total for 2021.

Wages Eligible for the ERC. Wages eligible for the ERC include an employee's regular salary, as well as the employee's share of health benefits paid by the employer.

Deduction Disallowance and Amended Income Tax Returns. No deduction is allowed for wages reimbursed by the ERC. For example, if an employer paid $10,000 in qualified wages to an employee and received a credit of $7,000, the employer may deduct only $3,000 of wages. Under current IRS guidance, an employer that deducted wages in a tax year and later claimed the ERC for those same wages should file an amended federal income tax return to correct any overstated deduction.

Application of Aggregation Rules. Members of controlled or affiliated service groups under Section 52(a) or (b) or Section 414(m) or (o) of the Internal Revenue Code are treated as a single employer for purposes of the ERC. For instance, multiple entities with common ownership could be aggregated for purposes of the 500-employee threshold, or for purposes of determining eligibility as a "recovery startup business." For example, if the owners of an existing business established a new business after February 15, 2020, with substantially similar ownership, the new business likely would not be eligible as a "recovery startup business." In addition, multiple entities with common ownership could be aggregated for eligibility purposes. If one entity in the group is eligible based on a COVID-19-related government order, all entities in the group, even those not subject to restrictions, could be eligible.