CARES Act Tax Credits
The American Rescue Plan Act of 2021 has adjusted provisions of the CARES Act by raising the maximum ERC (Employee Retention Credit) per employee from $5,000 (in 2020) to $28,000 (in 2021). The CARES Act has benefited large corporations, small businesses, hospitals, public health agencies, and state and local governments. Employers that leverage the new provisions of the CARES Act to defer their portion of taxes owe 50% of the deferred amount by December 31, 2021. The employees owe and are required to pay the "remaining 50% by December 31, 2022."
CARES Act: What Employees or Wages Qualify (Get Considered) for Tax Credits?
- Under the CARES Act, qualified wages include "wages (as defined in section 3121(a) of the Internal Revenue Code (the Code))." Qualified wages also include all "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)." Qualified wages include wages paid by an "eligible employer" to all or some employees after March 12, 2020, and before January 1, 2021.
- Qualified wages include qualified health plan expenses of eligible employers that are allocable to the wages.
- According to the IRS, the circumstances in which wage payments by eligible employers get considered as qualified wages partly depend on the average number of full-time employees in 2019.
- The Internal Revenue Service's "Qualified wages FAQ" page or related resources do not state the minimum wage (as of May 8, 2021) that an employee gets to be counted among the "full-time employees" (used in defining eligible companies as small or large).
- There is an upper limit of tax credit retention per employee considered under the CARES Act, which is equal to 50% of "qualified wages" under Section 2301 of the CARES Act. Companies can retain a maximum payroll tax credit of $5,000 per employee even where 50% of the employees' earning is higher than $5,000 for the period considered. This limit applies to wages paid between March 13 and December 31, 2020.
CARES Act: Covers All Emergency Family and Medical Leave (Expanded FMLA)
- Employers need to note that the CARES Act covers "paid sick and family leaves."
- The Emergency Family and Medical Leave Expansion Act of the CARES Act coves all employees working for an employer. There are special requirements for employees once laid off. If once laid off, employees must have worked for the employer for a minimum of 30 calendar days of the last 60 calendar days before their layoff.
- Employers should require that employees that request leave provide documentation of their need for leave (as customarily done with conventional FMLA requests). This documentation may comprise a notice posted on a school, government, or daycare website, newspaper publications, or an email from the school or provider indicating a closure. Documentation must be retained within the employer's records for the employer "to be eligible to receive the [associated] tax credit."
- The CARES Act has made it possible for an employee who was laid off by March 1, 2020, or later, and late rehired "by the same employer, eligible for paid leave under the FMLA." The CARES Act makes room for such employees to get paid leave if they were employed for a minimum of "30 of the last 60 calendar days prior to layoff."
The Employee Retention Tax Credit (ERTC): Another Portion of the CARES Act
- An article published by the United States Chamber of Commerce (updated January 7, 2021) indicates that the Employee Retention Tax Credit (ERTC) is another portion of the CARES Act that offers incentives to businesses to retain employees on their payroll throughout the COVID-19 pandemic.
- Employers that are eligible for "Employee Retention Tax Credit" are those that actively carried on any trade or business during the calendar year 2020 or 2021. This includes tax-exempt organizations. Eligible employers must meet "either of the two following tests:" Government Order Test and Reduced Gross Receipts Test.
- Employers are eligible if they experience a calendar quarter in which their trade or business operation gets fully or partially suspended within the calendar quarter. This suspension must be due to the order from an appropriate government authority limiting commerce, travel, or group meetings (for social, commercial, religious, or other purposes) because of COVID-19.
- An employer is eligible for the tax credit if the employer experiences a significant reduction in gross receipt.
- For 2020, a significant deduction (decline) in gross receipts is defined as a decrease in gross receipts to the tune of at least 50% in any calendar quarter of 2020 compared to the similar (identical) calendar quarter 2019.
- For 2021, an eligible decline in gross receipts is defined as a decline in gross receipts to the tune of at least 20% in any calendar quarter of 2021 compared to the similar (identical) calendar quarter of 2019.
Which Employers Qualify (are Eligible) for the Employee Retention Tax Credit?
Government Order Test
Reduced Gross Receipts Test
The American Rescue Plan Act of 2021 (ARPA)
- The American Rescue Plan Act of 2021 ("ARPA") has extended and expanded the Employee Retention Credit (ERC) through December 31, 2021.
- The Consolidated Appropriations Act of 2021 (CAA) has extended and enhanced the ERC by retroactively allowing employers to claim the ERC even if they have taken a PPP loan. Under the CARES Act, employers "could take a PPP loan or claim the ERC, but not both."
- Some benefits of the American Rescue Plan Act of 2021 (ARPA) include lowering the eligible employer threshold and raising tax credit rates, as discussed below.
- ARPA has made changes to the borrower criteria of the CARES Act program to increase the number of organizations and businesses eligible for PPP loans.
- Through the American Rescue Plan Act of 2021, the enhanced ERC is more favorable. It has lowered the threshold needed to become an "eligible employer" under the gross receipts test. It requires only a 20% decline in gross receipts when compared to a 50% decline requirement for the 2020 ERC.
- The American Rescue Plan Act of 2021 has raised the associated tax credit rate from 50% in 2020 to 70%.
- The American Rescue Plan Act of 2021 has raised the maximum qualified wages from $10,000 aggregate for the entire 2020 to $10,000 per quarter.
- The American Rescue Plan Act of 2021 has raised the full-time employees limit of small employers to 500 (one to five hundred) from the initial 100 full-time employees (one to a hundred) limit associated with the 2020 ERC. Small employers are allowed to claim all wages paid within the eligibility period. Large employers can only claim ERCs for wages they paid to employees that were not providing services.
- ARPA provides some additional or expanded benefits for the ERC. These two changes apply only to the third and fourth calendar quarters of 2021.
- ERC is available for "Recovery Startup Businesses." This provision applies to startup companies that founded a trade or business after February 15, 2020, with average annual gross receipts that that is less than $1 million. Startup companies that meet these conditions are eligible to claim the ERC even when they do not meet the requirement for "significant decline in gross receipts" or suspension of operations tests as outlined above. The amount of ERC available to these startups per employer going by this provision is "capped at $50,000 per quarter."
- The provisions of the CARES Act have also has provided an expanded ERC to benefit "Severely Financially Distressed Employers." To be considered distressed, an employer is required to suffer at "least a decline of 90% gross receipts in the quarter compared to the same quarter in 2019." Large employers (those with over 500 full-time employees) that meet this threshold can claim the ERC for all wages they have paid (this ERC is not limited to wages paid to employees when they are not providing any service.)
ARPA: Lowering of the Eligible Employer Threshold
ARPA: Raising of Tax Credit Rate to 70% (from 50% in 2020)
ARPA: Higher Maximum Qualified Wages
ARPA: Change in Definition of Small and Large Employers
ARPA: Higher ERC Per Employee
How ARPA Benefits Startups and Severely Financially Distressed Employers: Additional Expanded Benefits for Quarters 3 and 4 of 2021
How the CARES Act Is Creating Zero-Tax Corporations
- Apart from the array of tax breaks associated with the CARES Act, some companies are using a provision of the CARES Act to "carry back" their 2018 or 2019 losses to offset profits reported before 2018. This strategy results in a rebate that reduces 2020 taxes, "in some cases to less than nothing" (to a negative value).
- The CARES Act has loosened rules used to treat losses not just in 2020. It is also used to retroactively treat losses reported in 2018 and 2019 although these years were not affected by the pandemic. The CARES Act also allows corporations to carry their losses back as far as five years.
- Under the CARES Act, losses incurred within 2018, 2019, and 2020 can offset company income taxed at the higher 35% tax rate as effected before 2018.
Types of Companies Allowed the CARES Act Tax Credit (Tax Deferment)
- The CARES Act allows all employers (including government organizations) to defer the deposit and payments of their share of Social Security tax for some time.
- The CARES Act has benefited large corporations, small businesses, hospitals, public health agencies, and state and local governments.
When To Pay Deferred Taxes
- The sections 2302(a)(1) and (a)(2) of the CARES Act allows employers to defer the deposit their share of Social Security tax due during the "payroll tax deferral period." The sections also allowed employees to defer payments of taxes imposed on wages paid within that period. However, the payroll tax deferral period began on March 27, 2020, and ended December 31, 2020.
- The CARES Act has made it possible for employers to defer tax payment relative to their portion of payroll taxes (6.2% for Social Security taxes) due by March 27, 2020, up to December 31, 2020. When such taxes get deferred, an employer owes 50% of all deferred amount by December 31, 2021. The employee owes the "remaining 50% by December 31, 2022."