Section 2301 of the
Act provided a refundable payroll tax refund (ERTC) for companies whose business was impacted by Covid-19. The credit was applicable to qualified wages paid after March 12, 2020, and before January 1, 2021. CARES Soon after, The Taxpayer Certainty and Disaster Tax Relief Act of 2020 amended the CARES Act to extend the ERTC through the first two quarters of 2021. Additional changes to the ERTC were made under section 9651 of the American Rescue Plan Act of 2021. Most notably, the ARPA extended ERC eligibility for the last two quarters of 2021. Thus, employers were eligible for the ERC on qualified wages paid after March 12, 2020, and before January 1, 2020. Unfortunately, the Infrastructure Investment and Jobs Act signed on November 15, 2021, brought an early sunset to the ERTC. The IIJA only impacts the fourth quarter of 2021. The ERTC is still eligible to be claimed retroactively for any qualified wages paid after March 12, 2020, and before October 1, 2021. What is the definition of “Qualified Wages”?
Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the "Code")) and compensation (as defined in section 3231(e) of the Code), both determined without regard to the contribution and benefit base (as determined under section 230 of the Social Security Act), paid by an Eligible Employer to some or all of its employees after March 12, 2020, and before January 1, 2021. Qualified wages include the Eligible Employer's qualified health plan expenses that are properly allocable to the wages.
The specific circumstances in which wage payments by an Eligible Employer will be considered qualified wages depend, in part, on the average number of full-time employees it employed during 2019. For an Eligible Employer that averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of the employer's business operations by a governmental order, or (2) the business experiencing a significant decline in gross receipts. For an Eligible Employer that averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period in the calendar quarter in which the business operations are fully or partially suspended due to a governmental order or any calendar quarter the business is experiencing a significant decline in gross receipts Are wages paid by an employer to employees who are related individuals considered qualified wages?
No. Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the "Code"), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has of any of the following relationships to the employee's employer who is an individual:
A child or a descendant of a child; A brother, sister, stepbrother, or stepsister; The father or mother, or an ancestor of either; A stepfather or stepmother; A niece or nephew; An aunt or uncle; A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.
Who is eligible to claim the ERTC?
The employee retention credit is available only to companies that are eligible employers. Section 2301(c)(2)(A) of the CARES Act defines an “eligible employer” as an employer carrying on a trade or business during the calendar year 2020 and/or 2021, and meets one of the following tests for any calendar quarter:
The operation of the trade or business carried on during the calendar year 2020 is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. Such calendar quarter is within the period in which the employer had a significant decline in gross receipts, as described in section 2301(c)(2)(B) of the CARES Act. What does fully or partially suspended actually mean?
The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations.
Examples of such orders include: Limitation of an employer’s customer/store capacity An employer’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations An employer is required to move to an “online format” or “telework” that results in the operations of the business not continuing in a comparable manner as if the business were open regularly An employer's workplace is closed by a governmental order for certain purposes, but the employer's workplace may remain open for other purposes or the employer is able to continue certain operations remotely An employer that reduces its operating hours Employers that operate a trade or business in multiple locations and are subject to State and local governmental orders limiting operations in some, but not all, jurisdictions
If the order was effective for a portion of the calendar quarter, then the employer is an Eligible Employer for the entire calendar quarter.
What is a "significant decline in gross receipts"?
A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021. For Jan. 1, 2021, through June 30, 2021, for the 2021 ERTC, a significant decline in gross receipts means the period beginning with the first calendar quarter in 2021 where gross receipts are less than 80% of gross receipts for the same calendar quarter of 2019, and ending with the calendar quarter following the first calendar quarter where quarterly gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
Can I claim the ERTC if I received the PPP?
Originally, PPP recipients were disqualified from claiming the ERTC, but new legislation has brought change. PPP recipients are eligible, but any wages paid through the PPP loan are not classified as “qualified wages” and thus not eligible for the ERTC. If a company used up their PPP loan, then wages would once again be qualified, and the ERTC could be claimed.
What is a Severely Financially Distressed Business?
The IRS labels a business as “Severely Financially Distressed” if their gross receipts are less than 10% than the receipts of that quarter in 2019. This rule is particularly applicable for Large Eligible Employers because it allows them to treat all wages as qualified wages.
What is a Recovery Startup Business?
Section 3134(c)(5) of the Code defines a “recovery startup business” as an employer (i) that began carrying on any trade or business after February 15, 2020, (ii) for which the average annual gross receipts of the employer (as determined under rules similar to the rules under section 448(c)(3) of the Code) for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000, and (iii) that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. Section 3134(b)(1)(B) provides that in the case of an eligible employer that is a recovery startup business, the amount of the credit allowed under subsection 3134(a) (after application of the limit under subsection 3134(b)(1)(A)) for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.