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Employee Retention Credit

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Rödl & Partner Tax Matters Volume 2021-2, published February 5, 2021 and updated on April 30, 2021

 

On March 27, 2020, the CARES Act introduced a new Employee Retention Credit available for certain employers subject to a complete or partial government-mandated shutdown or a greater than 50% decline in gross revenue due to COVID-19.  Rödl Tax Matters Volume 2020-5 describes the qualifications and benefits available to employers under the Employee Retention Credit for the 2020 year.


The Employee Retention Credit was significantly expanded and extended through 2021 under the Consolidated Appropriations Act (CAA) signed into law on December 27, 2020 and the American Rescue Plan Act of 2021 signed into law on March 11, 2021.  Companies that received a PPP loan are now eligible to also claim the Employee Retention Credit.  This particular provision is retroactive to March when the credit was originally introduced.  Businesses should amend their 2020 quarterly payroll tax returns to claim the credit if they originally did not qualify for the credit because they had received a PPP loan.  Please note that businesses are not allowed to "double dip" on wages which were used to determine forgiveness of a PPP loan to also claim an Employee Retention Credit. Similarly, an Employee Retention Credit cannot be claimed on wages for which other federal benefits, such as credits for paid leave under the Families First Coronavirus Response Act (FFCRA), are claimed.


The eligibility requirements to claim the Employee Retention Credit for 2021 have changed.  Employers only need to now demonstrate a 20% decline in gross receipts (calculated on a worldwide controlled group basis) instead of the 50% decline that was required for 2020.  Alternatively, businesses subject to a complete or partial government-mandated shutdown can also still qualify for the credit. The employee threshold for computing qualifying wages is also extended from 100 full-time employees (for purposes of determining the 2020 credits) to 500 full-time employees (for purposes of determining the credits for the first two quarters of 2021).  These employee counts should be analyzed on a worldwide controlled group basis and would generally analyze the average number of employees for the 2019 year.  Further, the legislation specifies that the counts should be based on full-time employees as determined in accordance with section 4980H of the Internal Revenue Code, which could complicate the computations for companies with many part-time employees. Under section 4980H, full-time employees are defined as individuals providing more than 30 hours of service per week or more than 130 hours of service per month. The term "hours of service" does not include any hour for services to the extent the compensation for those services constitutes income from sources without the United States. This generally allows companies to exclude foreign employees from the headcount when determining whether they are above or below the 100 (for 2020) or 500 (for 2021) employee threshold for purposes of calculating qualified wages.


Under the rules applicable to the 2020 year for purposes of calculating the credit, businesses that had more than 100 employees in 2019 were allowed to use only the qualified wages of employees not providing services (employees being paid despite not working) because of a suspension or decline in business; however, businesses with less than or equal to 100 employees in 2019 could use all employee wages (assuming no double-dipping) to calculate the credit.  For 2021, businesses that had more than 500 employees in 2019 are allowed to use only the qualified wages of employees not providing services because of a suspension or decline in business; however, businesses with less than or equal to 500 employees in 2019 are allowed to use all employee wages (assuming no double-dipping) to calculate the credit.  


The amount of the credit has also increased for 2021.  For 2020 credit purposes, the credit was equal to 50% of the qualified wages.  For 2021, however, the credit has increased to 70% of qualified wages.  Employers can also claim up to $10,000 of eligible wages per employee per quarter for 2021 whereas they could only claim $10,000 annually per employee for 2020.


Employers may wish to consider these new rules for 2020 if they did not believe they qualified for the credit (for instance because they received a PPP loan or for other reasons) or for 2021 when the eligibility and credit calculation rules are significantly more taxpayer-friendly.  We have attached two flowcharts that should help businesses to determine whether they might be eligible for this credit for 2020 or 2021. 

 


 

 

When reading the charts, keep in mind the following:
  • If you did not have a mandated shutdown, determine eligibility in the left hand column.
  • If you had a mandated shutdown, but did not have a requisite reduction in business receipts, determine eligibility in the middle column.
  • If you had a mandated shutdown and had a requisite reduction in business receipts, determine eligibility for the credit in the right hand column.

 

Please contact your Rödl & Partner representative for additional information and assistance.

 

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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