The Consolidated Appropriations Act, 2021 (the Act) signed into law by President Trump on Dec. 27, 2020 includes significant modifications to the Employee Retention Tax Credit (ERC) enacted under the CARES Act. The credit originally provided a 50% refundable tax credit for businesses that maintain employee payroll, even amidst temporary business closures due to government-mandated lockdowns, or considerable downturns in gross receipts due to loss of business. This article will highlight changes to the ERC for 2021.
Period of Credit Availability
The CARES Act originally provided credit for qualified wages paid after March 12, 2020 and before Jan. 1, 2021. The new law extends availability of the credit for qualified wages to the first two quarters of 2021 (before July 1, 2021).
Amount of Credit
Under the original law, the credit amount was set at 50% of the qualified wages paid to the employee, plus the cost to continue providing employee health benefits. The Act increases the credit amount to 70% of qualified wages, which is intended to include the cost of employee health benefits.
Maximum Credit Amount
The CARES Act capped the credit at $5,000 per employee for all qualified wages paid during 2020, but the Act increases the maximum credit to $7,000 per employee for each of the two quarters in 2021, so the maximum credit for 2021 will be $14,000.
Eligibility Requirements for the Credit
In order to qualify for the ERC under the original law, businesses must have been experiencing full or partial suspension of operations due to a Covid-19 lockdown order. They could also qualify if, for any quarter in 2020, gross receipts were less than 50% of gross receipts for the same quarter in 2019. With the passage of the Act, businesses whose operations are either fully or partially suspended by a government-mandated lockdown order due to Covid-19 or whose gross receipts are less than 80% of gross receipts for the same quarter in 2019 can qualify for the ERC.
Credit Eligibility Whether or Not Employees Are Working
For a company with more than 100 employees, the original law under the CARES Act did not provide credit for wages paid to employees who were performing services for the employer in some capacity. However, a company with 100 employees or less did qualify for the credit, even if the employee was working. The Act raises this threshold to 500 employees, so that for the first two quarters of 2021, a company with 500 or fewer will be eligible for the credit, even if employees are working.
PPP Loan Eligibility
A company that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC under the original CARES Act. With the passage of the Act, companies that received a PPP loan in 2020 may also qualify for the ERC. To prevent double dipping, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. However, amounts paid that were either not forgiven or are over and above the PPP loan amounts can be included for ERC purposes.
President Trump recently signed a second stimulus package—called the Consolidated Appropriations Act, 2021 (Act)—into law. The legislation includes over $300 billion in aid for small businesses. Below is a breakdown of some of the business tax changes and extenders in the new COVID-19 relief bill.
Payroll Tax Credit for Paid Sick and Family Leave
The refundable payroll tax credit for paid and sick family leave, established in the Families First Coronavirus Response Act, is extended until March 31, 2021. The tax credits are modified so that they now apply to practically any payments made to workers for these purposes.
Payroll Tax Repayment
The time frame for employees to repay deferred employment taxes under the President’s executive order, which was issued in August 2020, has been extended from April 2021 to December 31, 2021.
Employee Retention Credit
The Employee Retention Credit (ERC) under the CARES Act has extended to July 1, 2021. Further, the refundable tax credit has increased from 50% to 70%, the per-employee wages limitation has increased from $10,000 per year to $10,000 per quarter, and the determination of a large employer for purposes of the ERC has increased from 100 to 500 employees.
30-Year Depreciation of Certain Residential Rental Property
The new law determines that the recovery period relevant to residential rental property placed in service before Jan. 1, 2018, and held by an electing real property trade or business, is 30 years.
Business Meal Deduction
Rather than the current 50% business expense deduction for meals, the bill temporarily allows a 100% expense deduction for meals provided by restaurants in 2021 and 2022.
Deduction for Energy Efficient Commercial Buildings
The deduction for energy-efficient improvements to commercial buildings, such as lighting, heating, cooling, ventilation, and hot water systems was made permanent. The amount will be inflation-adjusted after 2020.
Changes to the Work Opportunity Tax Credit
If employers hire workers who are members of one of more of ten targeted groups under the Work Opportunity Tax Credit (WOTC) program, they are permitted to use an elective general business tax credit. Previously applicable to hires before 1/1/2021, the TCDTR extends the credit through 2025.
Employer Payments of Student Loans
Section 127, which permits employers to provide certain educational assistance to employees on a tax-free basis, was modified under the CARES Act to authorize the payment by an employer of principal or interest on specific employee qualified education loans through December 31, 2020. The Consolidated Appropriations Act expands this through December 30, 2025. As the pandemic subsides, employers may want to consider this valuable tax-free benefit.
Health and Dependent Care Flexible Spending Arrangements
The bill allows taxpayers to roll over unused funds in their health and dependent care flexible spending accounts from 2020 to 2021 and from 2021 to 2022. This arrangement also permits employers to grant employees a 2021 midyear prospective adjustment in contribution amounts.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act Provider Relief Fund was initially established to provide funding to healthcare service providers impacted by the COVID-19 pandemic. While the financial support has provided much-needed relief, the programs introduced some additional rules and reporting requirements for healthcare providers. On October 22, 2020, the Department of Health and Human Services (HHS) updated its guidance on how providers should report their Provider Relief Fund (PRF) payments that have been allocated for expenses and lost revenues as a result of the pandemic. Below is an overview of what you need to know.
Key Clarifications to Instructions
Addressing some of the ambiguity present in the previous September 19 update, two key clarifications were set forth.
- Method of accounting: The HHS has clarified that PRF payments should be reported using the provider’s normal method of accounting (cash or accrual basis).
- Lost revenue definition: In a twist from prior instructions, which defined lost revenue as a negative change in year-over-year net patient care operating income, recipients may now apply PRF payments up to the amount of the differences between their 2019 and 2020 actual patient care revenue.
If recipients do not use PRF funds in full by the end of the 2020 calendar year, they will have a further six-month period in which to utilize leftover amounts for expenses attributable to the pandemic but not repaid by other sources, or to apply toward lost revenues in an amount not greater than the difference between 2019 and 2021 actual revenue.
PRF Reporting Requirements
The deadlines from here on out are as follows:
- January 21, 2021: HHS portal opens for PRF reporting
- February 15, 2021: Reporting deadline for all providers on use of funds, assuming all proceeds were accounted for in 2020
- July 31, 2021: Final reporting deadline for providers who did not fully spend PRF funds before December 31, 2020
- September 30, 2021: Due date for the single audit or program-specific audit reports for a December 31 year-end or the earlier of 60 days from the date of the issuance of the audit report
PRF recipients can start submitting PRF reports documenting how funds were spent or attributed beginning January 15, 2021. The level of reporting requirements differs by the amount received as follows:
- Entities that received less than $10,000 in total from the PRF do not have to file a report
- Entities that received more than $10,000 but less than $500,000 must submit a simplified report with only these broad expense categories: general administrative expenses and other healthcare-related expenses.
- Entities that received more than $500,000 in PRF must submit a detailed report described below.
- Entities that received over $750,000 in PRF may also be subject to an audit per federal regulations.
If an entity received more than $750,000 in PRF, they may be subject to an audit per federal regulations. Audits are required for entities (non-profit and commercial as it relates to PRF per HHS guidelines) that spent over $750,000 from federal grant funds in a reporting period. Note the difference between receiving $750,000 and spending $750,000. Some funds could have been received in cash but not yet spent.
Let MKR CPAs & Advisors help
Our trusted advisors are equipped with the expertise to help you unravel the complexities of these reporting requirements. If you need assistance, contact an MKR advisor today to get the conversation started.