One of the key business tax provisions of President Biden’s American Rescue Plan Act (ARPA) of 2021 as mentioned in our March 11th alert was a doubling of the Employee Retention Credit (ERC) for 2021 to $28,000 per employee and an expansion of the Paycheck Protection Program (PPP) program.
Employee Retention Credit (ERC) Updates
The ERC, enacted in the CARES Act, was ignored by PPP borrowers until the Consolidated Appropriations Act allowed taxpayers to obtain both a PPP loan and claim the credit.
Under the new legislation, an employer who receives a PPP loan, and the loan is forgiven, is eligible to take the ERC in 2020 and 2021.
The ARPA extends the ERC through December 31, 2021 which now allows businesses to claim an ERC payroll tax credit of up to $7,000 per employee per quarter or $28,000 per employee for the entire year – more than five times the benefit available in 2020!
In order to qualify for the ERC, a company must experience either partially or fully suspended operations due to restrictions imposed by the government or a significant decline in gross receipts.
For 2020, a “significant decline” in gross receipt occurs if an employer’s gross receipts for a given quarter are less than 50% of its gross receipts for the same calendar quarter in 2019. However, for 2021 an eligible quarter only requires a decline in gross receipts of more than 20% as compared to the same applicable quarter in 2019.
The ARPA created a new tax provision for “recovery start-up businesses” (“RSBs”) that began carrying on a trade or business after February 15, 2020. An RSB meets the ERC eligibility test even if it does not meet the ERC requirement of either suspended operations or a significant decline in gross receipts. In order to qualify, the RSB must have average annual receipts under $1,000,000 and the ERC is limited to $50,000 per quarter.
Another new category of eligibility is “severely financially distressed employers,” which the ARPA defines as companies experiencing a gross receipts reduction of more than 90% as compared to the same quarter in 2019.
Like current ERC rules, an election is available to use the immediately preceding calendar quarter (sans 2020) for purposes of the gross receipts test. For example, for purposes of determining eligibility for the second quarter of 2021 under the gross receipts decline test, an employer may elect to compare the first quarter of 2021 to the first quarter of 2019.
A financially devastated employer who meets this test would be able to treat all wages paid to employees during the applicable quarter as qualified wages, even if it exceeds the 500 full-time employee ceiling.
The ARPA changes to the ERC are effective for calendar quarters after June 30, 2021 and the IRS statute of limitations on assessing amounts attributable to the ERC is extended from three to five years.
In December, U.S. Congress passed a $900 billion coronavirus relief bill which provided a second round of Paycheck Protection (PPP) loans in the amount of $284 billion and expanded the loan eligibility to 501(c)(6) non-profit organizations and includes loan set-asides for very small businesses (10 or fewer employees) and community-based lenders.
Now, the ARPA provides an additional $7.25 billion in PPP funding for both initial and second draw loans and expands the program to include more nonprofits and digital media companies.
Large nonprofits with multiple locations may now apply for PPP loans if each location employs no more than 500 employees per physical location. Under the ARPA, Sections 501(c)(5) labor organizations, 501(c)(7) social and recreational clubs, and 501(c)(8) fraternal benefit societies also are now eligible for the PPP.
The ARPA also adds a new category of nonprofit entities eligible for PPP loans called an “additional covered nonprofit entity,” which is defined as a nonprofit entity (other than 501(c)(3), (4), (6), and (19) organizations) (1) that does not receive more than 15% of its gross receipts from lobbying activities, (2) whose lobbying activities are not more than 15% of the total activities of the organization and the cost of lobbying activities does not exceed $1 million during the most recent tax year that ended prior to February 15, 2020, and (3) that does not employ more than 300 employees.
A digital media company that employs not more than 500 people per physical location and is able to certify in good faith that it is an internet-only news publisher or internet-only periodical publisher engaged in the collection and distribution of local or regional and national news and information also is now eligible to apply for a PPP loan.
These applicants also will need to include a good-faith certification that the proceeds of the PPP loan will be used to cover expenses related to the organization’s component that supports local or regional news.
The effective date for these changes is March 11, 2021 and currently the PPP program is scheduled to close March 31, 2021. However, Congress is expected to extend the PPP loan application deadline to May 31, 2021.
Please reach out to your RINA professional to help assess your eligibility for the ERC and/or a PPP loan. We invite you to contact RINACARESTeam@rina.com for further information and assistance.