The American Rescue Plan Act of 2021 (ARPA) offered across-the-board relief for many individuals and small-business owners. One of the most significant parts of the law is the expansion and extension of the employee retention tax credit (ERTC) through 2021. The law makes important changes that will apply beginning in July 2021, when the existing ERTC provisions were set to expire.
That might mean some business clients will become eligible to claim the credit for the first time later this year — and all clients should pay attention to the changes that have the potential to make the tax credit more valuable, as well as technical changes that could become important down the road.
Extension of ERTC Provisions
Under the ARPA, the employee retention tax credit provides a refundable tax credit of up to 70% of qualified wages in 2021 and 50% of qualified wages in 2020 (up to a $10,000-per-employee, per-quarter cap). Employers who have experienced a 20% year-over-year decline in per-quarter gross receipts (or qualifying suspension of business) remain eligible.
Employers can continue to claim the credit even if they've received a Paycheck Protection Program (PPP) loan, but cannot claim the credit with respect to wages paid with forgiven PPP funds. The same is true if the business used funds forgiven under another recovery relief provision, such as a restaurant revitalization grant.
As under prior law, employers with up to 500 employees can continue to claim the credit with respect to wages paid even if employees provide no services during the relevant time periods. In 2020, the threshold for determining whether an employer could claim credit for wages paid while an employee was not providing services was 100 employees.
Modifications to ERTC Rules
The ARPA codified the employee retention tax credit into new IRC Section 3134. Most of the modifications will apply, at least initially, for the third and fourth quarters of 2021 — when existing ERTC rules were set to expire. That means eligible employers will be entitled to claim the credit for all four quarters of 2021, rather than only the first two quarters — making the credit worth up to $28,000 per employee for 2021.
