The 2021 Appropriations Act lowered the revenue decline threshold for Employee Retention Credit eligibility for companies with fewer than 500 employees. For the first two quarters of 2021, companies must experience a greater than 20 percent reduction in gross receipts over the same quarters in 2019. Companies may also elect to use the immediately preceding quarter as their comparative quarter (i.e., fourth quarter of 2020). Additionally, the credit percentage has been increased from 50 percent to 70 percent of eligible wages (in addition to being a quarterly test as opposed to annual). The impact to companies is a maximum credit per employee in 2021 of $14,000 compared to a $5,000 credit per employee in 2020. We believe this expansion of the credit amount and reduction of the qualification threshold may provide a significant opportunity for many companies.
With respect to 2020 employee retention credits that you may now be eligible to claim, the IRS has not provided guidance on how to claim the credits as refunds or as credits against future tax liabilities. In addition, guidance is needed to address situations for companies that have already submitted applications for PPP forgiveness and incorporated wages in excess of the minimum amount required for forgiveness (60%). In the event a taxpayer has not submitted the application for forgiveness, careful consideration should be given to the disclosure relating to the expenses that are being used to calculate forgiveness. Although this has not been confirmed, it is possible the IRS may look to the taxpayer’s forgiveness application to determine the amount of wages that are not eligible for Employee Retention Credit. In this context, a smaller wage allocation on the forgiveness application may result in a greater employee retention credit.
The United States Congress is currently considering revisions that would extend the employee retention tax credit, and/or modify the calculation and structure. We will continue to monitor these changes as they progress through Congress.
Your professional team at Miller, Cooper & Co., Ltd. is here to help you understand this new legislation. Please contact a member of your service team for additional guidance and assistance.