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Strategic Decision Making: Are You Taking Advantage of the Newly Expanded ERC?

May 4, 2021

The IRS has issued a series of notices providing guidance for employers claiming the employee retention credit (ERC) for 2020 and 2021. The credit was originally created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, then extended and modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act of 2021.

The IRS more clearly defined ERC eligibility and explained how the ERC and Paycheck Protection Program work in tandem. Notice 2021-23, released in early April 2021, explains the changes for the first and second calendar quarters of 2021, including:

  • The increase in the maximum credit amount
  • The expansion of the category of employers that may be eligible to claim the credit
  • Modifications to the gross receipts test
  • Revisions to the definition of “qualified wages”
  • New restrictions on the ability of eligible employers to request an advance payment of the credit

For the 2021 credit, the ERC is equal to up to 70% of the qualified wages paid to employees after December 31, 2020, through September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. The maximum ERC available is $7,000 per employee per calendar quarter, for a total of $21,000 for the first three calendar quarters of 2021.

Effective January 1, 2021, eligible employers include those that operated trade or business between January 1, 2021, and September 30, 2021, and experience either of the following:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
  2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%).

Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for all calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

Additional instructions on how to calculate and claim the ERC for portions of 2021 are available in Notice 2021-23.

With these guidelines, your business may be eligible to receive expanded payroll tax credits. If you have any questions regarding your business’ eligibility and would like to discuss the process of calculating and applying for this credit, please contact your local CRI tax advisor.

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