Congress signed the Consolidated Appropriations Act of 2021 on December 27, 2020. This act changed the employee retention tax credit that was originally introduced by the CARES Act in March 2020. The employee retention tax credit is a refundable payroll tax credit that incentivizes qualified employers to continue paying their employees. The following are key changes to the credit:
Eligibility
CARES Act: To qualify for the credit, businesses (including nonprofit organizations) needed to meet one of the following requirements:
- Had operations that were fully or partially suspended due to a COVID-19 government order.
- Had a decrease in gross receipts that were less than 50% of gross receipts in the same quarter of 2019 (example: a business with $100,000 gross receipts in quarter 2 of 2019 and $49,000 gross receipts in quarter 2 of 2020 would be eligible)
Previously, businesses that received a Paycheck Protection Program (PPP) loan were not eligible to claim the credit.
Consolidated Appropriations Act (CAA): Businesses (including nonprofits) are eligible for the credit if they
- suffered from operations that were fully or partially suspended due to a COVID-19 government order (no change from the CARES Act); or
- suffered from a decrease in gross receipts that were less than 80% of gross receipts in the same quarter of 2019 (example: a business with $100,000 gross receipts in quarter 2 of 2019 and $79,000 gross receipts in quarter 2 of 2021 would be eligible).
Businesses that received a PPP loan are now eligible to claim the credit under the CAA. Please note that the credit cannot be claimed on the wages that are used for the PPP loan forgiveness. Under the CAA, formerly ineligible businesses can retroactively claim the credit for wages paid after March 12, 2020. The IRS has not yet provided guidance on how this is accomplished; however, it appears that the credit can be claimed either on the 2020 fourth quarter return or by filing amended employer quarterly tax returns with Form 941-X (please note that the 50% decrease in gross receipts would still be a requirement for any quarters ending before January 1, 2021).
What are “gross receipts” for a nonprofit?
Gross receipts for a tax-exempt organization, for purposes of determining eligibility for the Employee Retention Credit, include gross receipts from all operations, not just from activities that constitute unrelated trades or businesses.
For this purpose gross receipts include amounts received from total sales (net of returns and allowances) and all amounts received for services, whether or not those sales or services are substantially related to the organization’s exercise or performance of the exempt purpose or function constituting the basis for its exemption. Gross receipts also include investment income, including dividends, rents, and royalties, as well as the gross amount received as contributions, gifts, grants, and similar amounts, and the gross amount received as dues or assessments from members or affiliated organizations.
Credit Calculation
CARES Act: The credit was originally calculated based on 50% of qualified wages (including cost of health benefits) up to $10,000 per employee, annually for qualified wages paid after March 12, 2020 and before January 1, 2021. The total annual credit was capped at $5,000 per qualified employee ($10,000 qualified wages x 50%).
CAA:The credit is now calculated based on 70% of qualified wages (including cost of health benefits) up to $10,000 per employee, per quarter for qualified wages paid on or after January 1, 2021 and before July 1, 2021. The total annual credit is now capped at $14,000 per qualified employee ($10,000 qualified wages x 70% x 2 quarters).
Eligibility of Wages
CARES Act:Businesses with over 100 employees could only take the credit on wages paid to employees who were unable to perform any services due to suspended operations or a decline on gross receipts. Businesses could not take the credit on wages paid to employees who continued to provide services (whether in office or from home). For businesses with 100 or less employees, the wages of all employees qualified.
CAA:The number of employees increased to over 500, effective January 1, 2021. Businesses with over 500 employees can only take the credit on wages paid to employees who are unable to perform any services due to suspended operations or a decline on gross receipts. Businesses cannot take the credit on wages paid to employees who continue to provide services (whether in office or from home). For businesses with 500 or less employees, the wages of all employees would qualify.
If you have questions or would like more information, please contact
Donita Joseph at
[email protected] or
844.4WINDES (844.494.6337).
