Now that President Biden has signed the American Rescue Plan Act into law, the Employee Retention Tax Credit deadline has been extended through the end of 2021. The ERTC was created to assist employers experiencing economic hardship or closure due to COVID-19.
During an SFA Ask the Expert webinar, Thursday, Jeffery B. Tate, tax partner at Arent Fox LLP, explained the ins and outs of the program, including who is eligible and key changes made due to the newly passed Rescue Plan.
Eligibility
An employer may be eligible for the ERTC if it meets one of two criteria, said Tate. The first is if the company’s business is fully or partially suspended during a calendar quarter due to a governmental order and such suspension has more than a nominal impact on the business. The second is if the business experiences a “significant decline” in gross receipts.
According to Tate, for a business to be fully or partially suspended, the government order must be from an appropriate governmental authority (federal, state, or local) and must limit “commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.”
The time period considered for significant decline in gross receipts in 2020 began on the first day of the first calendar quarter for 2020 for which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019, said Tate. For 2021, an employer satisfies the test when the employer’s gross receipts are reduced by greater than 20 percent as compared to the same quarter in 2019. The time period ends either the first day of the first calendar quarter in 2020 in which the employer’s gross receipts are greater than 80 percent of gross receipts in the same quarter of 2019, or on January 1, 2021, whichever comes first.
Key Changes Made in the American Rescue Plan
In addition to the extension of the program through December 31, 2021, Tate outlined the following changes that have been made upon the signing of Biden’s Rescue plan:
• For “severely financially distressed employer” (i.e., an employer that experienced a gross receipts reduction of more than 90 percent as compared to the same quarter in 2019), the employer may treat all wages paid to employees as qualified wages, regardless of the number of full-time employees (similar to the situation for a small employer).
• Startup businesses established after February 15, 2020, with annual gross receipts of up to $1 million and that otherwise do not meet the ERC eligibility tests are now eligible for the ERTC. The startup ERTC is capped at $50,000 per quarter, per employer, and the credit is computed under the regular ERTC rules.
• The normal three-year statute of limitations for the IRS to make an assessment of any amount attributable to the ERTC has been extended to five years.
Additional Proposals to Look Out For
In addition to the ERTC, Tate advised small business owners to be aware of other tax proposals in Biden’s tax plan, including:
• The increase of the corporate income tax rate from 21 to 28 percent
• The addition of a 15 percent minimum tax on global book income of $100 million or more
• The phase-out of the section 199A deduction for those making more than $400,000
• An increased rate on the global intangible low-taxed income to 21 percent (from 10.5 percent) applied on a country-by-country basis
Related: Biden Signs Restaurant Revitalization Into Law; Employee Retention Credit is 'Hidden Gem' for Businesses.