The ERC, created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was extended for six months and modified by the Consolidated Appropriations Act, 2021 (CAA).
In March, the IRS provided guidance for employers claiming the ERC for 2020. Notice 2021-23 addresses the extension of the ERC for the first two quarters of 2021. The American Rescue Plan Act of 2021 (ARPA) extended the ERC through December 31, 2021. The IRS will provide more guidance on changes to the ERC available under the ARPA later. Changes to the ERC under the CAA The CAA extends the ERC from January 1 through June 30, 2021.
Notice 2021-23 details changes to the ERC under the CAA, including:
• An increase to the maximum credit amount. Eligible employers can claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages they pay to employees from January 1 through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter (a total of $14,000 for the first two calendar quarters of 2021).
- More employers may be eligible to claim the ERC. Federal and state governments and agencies are not eligible for the ERC; however, the CAA adds certain governmental employers as potential eligible employers, including §501(c)(1) organizations exempt from tax.
- A governmental entity that is a college or university or whose principal purpose or function is to provide medical or hospital care may also be eligible.
- Modification of the gross receipts test.
Employers are now permitted to use an alternative quarter to calculate gross receipts. Under this election, an employer may generally determine if the decline in gross receipts test is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019 (substituting 2020 for 2019 if the employer did not exist as of the beginning of that quarter in 2019). Eligible employers must maintain documentation to support their determination of the decline in gross receipts, including which calendar quarter they elected to use to measure the decline. An election to use an alternative quarter to calculate gross receipts is made by claiming the ERC for the quarter using the alternative quarter to calculate gross receipts.
- For 2021, “large” eligible employers had more than 500 full-time employees during 2019, and “small” eligible employers had 500 or fewer employees in 2019. Previously, the dividing line was 100 full-time employees.
- Claiming the ERC. To claim the ERC, eligible employers can reduce employment tax deposits. The CAA allows only small employers (500 or fewer full-time employees in 2019) to receive an advance payment of the ERC in an amount not to exceed 70% of the average quarterly wages paid in calendar year 2019 (the 70% advance rule). Small employers can request advance payment of the credit on Form 7200, Advance of Employer Credits Due to COVID-19, after reducing their deposits. Advances are no longer available for larger employers.