The Consolidated Appropriations Act, 2021 (CAA) which was signed into law on December 27, 2020, modified a number of employer payroll credits previously enacted.

The modifications to the Employee Retention Credit (ERC) are some of the most time sensitive contained within the CAA.  These modifications to the ERC are included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).  The TCDTR addresses that those employers who previously received Paycheck Protection Program (PPP) loans may be eligible for the ERC.  For eligible employers, the ERC may be claimed retroactive effective for qualified wages paid after March 12, 2020 and before July 1, 2021.

The wages used to claim the ERC may not include payroll costs funded with proceeds of a PPP loan previously forgiven.  Any payroll amounts used to claim the ERC must exclude amounts used in calculating or determining PPP loan forgiveness amounts.  For any employers, whose PPP loan forgiveness is denied; any wages paid in the second or third quarter which were included as payroll costs on the denied application may claim the ERC related to those qualified wages on the fourth quarter Form 941, Employer’s Quarterly Federal Tax Return. 

An employer may claim the credit on qualifying wages during the first three quarters of 2020 on their fourth quarter 2020 payroll tax returns, if not already filed.  The IRS guidance also stipulates that, “You can also report on your fourth quarter Form 941 any ERC related to health expenses that are qualified wages that you didn’t include on your second and/or third quarter Form 941”.  The fourth quarter 2020 Form 941/Form 944 returns are due by February 1, 2021. 

The IRS has acknowledged that guidance has been issued with a limited timeframe to implement and accordingly noted that is not necessary to use the fourth quarter procedure.  Alternatively, taxpayers may opt to use the regular payroll tax filing process and file an amended return or claim for refund for the applicable quarter to which any additional ERC relates using Form 941-X. 

The ERC is a refundable credit, in calculating the allowable credit, employers must reduce qualified wages by any credits received in anticipation of the paid sick and family leave credit provided by the Families First Coronavirus Response Act (FFCRA) and any wages paid to those employees for which the employer will claim a Work Opportunity Tax Credit (WOTC) during these respective quarters.

Additionally, the IRS has provided guidance with respect to filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. “Employers that file Form(s) 941, 943, 944, or CT-1 may file Form 7200 to request an advance payment of the tax credit for qualified sick and family leave wages and the employee retention credit. You will need to reconcile any advance credit payments and reduced deposits on your employment tax return(s) that you will file for 2020. You can request the amount of the credit that exceeds your reduced deposits by filing Form 7200 or waiting to get a refund when you claim the credits on your employment tax return.”

Some important updates to the ERC Include: 

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 In general, to qualify for the credit, an employer must:

    A. Have carried on a trade or business during the calendar year 2020.

                                   AND

    B. The operations of that trade or business were EITHER:

           1. Fully or partially suspended due to orders from an appropriate governmental
               authority limiting commerce, travel, or group meetings due to COVID-19.

                                   OR

           2. Had a decline of gross receipts for at least one calendar quarter of 2020 that are
               less than 50% of gross receipts received during the same calendar quarter(s) in
               the prior year. Beginning January 1, 2021 this decline in gross receipts is
               recognized as a quarter in which gross receipts are 20% less than the
               corresponding quarter in 2019 (or 2020 for new employers who were not in
               existence during 2019)

This information provides a basic explanation of the changes between the ERC allowed for 2020 and 2021. There are other facts and limitations that may come into play when determining eligibility and other factors required for calculating the credit and its resulting effect on income tax.  

Form 7200 – Advance Payment of Employer Credits Due to COVID-19, may be filed if you cannot reduce your employment tax deposits to fully account for the amount of the credit.

Please contact our office if you would like to discuss your specific circumstances.

Ellen Marvin is the Director of the Client Accounting and Advisory Services (CAAS) Group at SobelCo.

Karen Henderson is a CPA and Senior Tax Manager in the SobelCo Tax Practice.