The American Rescue Plan Act of 2021 expands some common tax credit regulations and makes other changes to a key tax regulation related to restrictions on the deduction of compensation. These changes are summarized below.
Qualified paid sick leave and family leave tax credits
The act extends the tax credits originally introduced and qualified under the Family First Coronavirus Response Act (and then extended to March 31, 2021 under the Consolidated Appropriations Act of 2021 (CAA)) for qualified paid sick leave (PSL) and paid family vacation wages (PFL). The law extends these loans until September 30, 2021 with certain changes.
Insured employers are not required to provide PSL or PFL in 2021. However, employers who choose to do so are entitled to tax credits on wages paid for such vacation, subject to certain restrictions.
Vacation extension
The law expands the types of vacation that are eligible for tax credits between April 1, 2021 and September 30, 2021. PSL and PFL now include vacation granted to an employee to receive a COVID-19 vaccine, recover from injury, disability, illness, or condition related to a COVID-19 vaccine, or to wait for COVID-19 -Test results or diagnosis based on exposure or employer request. The act also expands other reasons PFL can be made available for tax credit purposes. For more information, see The American Bailout Plan Extends FFCRA Tax Credit But Not Mandate.
The wages taken into account for PSL are limited to a maximum of 511 USD per day for a maximum period of 10 days between April 1, 2021 and September 30, 2021 (but may be lower depending on the reason for the PSL) The account for PFL is after limited to $ 12,000 by law. The tax credits for these PSL and PFL are capped at the employer's Medicare tax amount for that quarter, but any excess will be treated as an overpayment that must be refunded. The credits were previously (before April 1, 2021) offset against the employer's social security taxes. Advanced credits are permitted under the law.
Expenditure on qualified health plans
Qualifying wages also include spending on qualified health insurance that can be properly allocated to PSL and PFL wages. For this purpose, “Qualified Health Insurance Expenses” should be understood to mean amounts that an employer has paid or incurred for the provision or maintenance of a group health plan, but only to the extent that these amounts are excluded from the gross income of the employees. While the allocation must comply with the applicable regulations, an allocation is deemed to have been properly made if it is made proportionally among the insured employees on the basis of the periods of cover (in relation to the vacation periods to which the wages refer). The law also contains specific provisions for amounts paid under collective agreements.
restrictions
The law precludes “double immersion”. Therefore, wages paid for providing PSL or PFL for which a tax credit is granted may not count towards certain other credits, including Section 45S (Employer Credit for Paid Family and Sick Leave), Section 51 (Credit for Employment Opportunities) . and Section 3134 (Employer Loyalty Credits That Must Be Closed After June 30, 2021 due to COVID-19). To the extent that wages are taken into account for loyalty credit purposes prior to July 1, 2021, the loan for wages paid to provide PSL or PFL will be reduced by the portion that is attributable to the loyalty credit. Likewise, credit cannot be granted for wages paid by an employer that are counted as wage costs related to loans for awarded wage protection programs.
Government employers are not eligible for tax credits on wages paid for providing PSL or PFL.
Non-discrimination
The law provides a non-discrimination obligation for employers in order to receive the tax credits made available under the law. Employers cannot claim a tax credit for PSL or PFL wages paid in a calendar quarter if the employer discriminates against high-paid workers (within the meaning of Section 414 (q) of the Internal Revenue Code), full-time workers. or employee based on length of service in providing the PSL or PFL, if applicable. This requirement was not included in the CAA, which extended the tax credit through March 31, 2021 for insured employers who voluntarily granted leave. Presumably, this is a response to employers who selectively grant leave.
Extension of the statute of limitations for credits
Finally, the law extends the statute of limitations for setting an amount attributable to a credit for wages paid for providing PSL or PFL to five years after the later date of filing the original return for which the credit was set or the date on which the tax return is treated as tax law. Such an extended statute of limitations makes it even more important that employers properly determine eligibility for the tax credits and keep adequate records for the required period of time.
We expect additional guidance from the Internal Revenue Service regarding these credits in the form of FAQs or Treasury Regulations.
Loan extension for employee loyalty
The Employee Retention Credit (ERC) was originally enacted under Section 2301 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and extended by the CAA. It grants certain employers a tax credit on qualified wages paid to employees. Under the CARES Act, the 2020 ERC was capped at $ 5,000 per employee. The CAA expanded the ERC to include qualified wage payments made between January 1, 2021 and June 30, 2021, and increased the maximum loan amount to $ 7,000 per employee per quarter.
The law extends the ERC by a further two quarters through the end of 2021 and expands the potential applicability of the ERC to certain employers. So when the CARES Act 2020 credits of $ 5,000 per employee and the CAA credits of $ 7,000 per employee for the first two quarters of 2021 add up, most eligible employers may be able to get one Receive ERC of up to $ 33,000 per employee.
Expansion of the ERC until 2021
The ERC is codified in law as Section 3134 of the Internal Revenue Code. As codified, the ERC will be extended to qualifying wages paid after June 30, 2021 and before January 1, 2022 (i.e. for the third and fourth quarters of 2021). For this period, in accordance with the CAA, the loan amount is usually 70 percent of the qualifying wage. Because qualified wages are generally capped at $ 10,000 per employee per quarter, Section 3134 of the Code generally limits the amount of the ERC to a maximum of $ 7,000 per employee per quarter.
It is important that section 3134 of the Code only applies to “wages paid after June 30, 2021 and before January 1, 2021”. For 2020 and the first and second quarter of 2021, the applicable provisions of the CARES Act and the CAA govern the ERC.
Amount of the ERC
The law changes the amount of the ERC in two ways. First, the law increases the amount of the ERC available to "severely financially disadvantaged employers". A “financially troubled employer” is an employer whose gross income has fallen by more than 90 percent compared to the same quarter of the previous year. These employers can treat all wages paid to employees as qualified wages regardless of the size of the employer and the number of employees. The ERC is therefore not limited in relation to such units. Additionally, the amount of the ERC for certain new businesses (hereinafter referred to as recovery startups) is capped at a total of $ 50,000 per quarter.
Eligible employers
In accordance with the CAA, under Section 3134 of the Code, an Eligible Employer for a calendar quarter is any employer who is engaged in a trade or business and, under government regulations related to COVID-19, trade, travel, or group meetings, or gross income for a such quarter that is less than 80 percent of gross receipts for the same calendar quarter in 2019 (subject to a special alternative rule). In addition, the law adds a startup startup company as an additional eligible employer category. A recovery startup is one that was founded after February 15, 2020 and has gross annual revenues less than or equal to $ 1 million. A recovery startup company will also be eligible if it does not otherwise meet the general ERC requirements of the eligible employer (suspension by government order, reduction in gross income, etc.). However, the amount of ERC available to a recovery startup company is capped at $ 50,000 per quarter.
Qualified wages
In accordance with the CAA, the level of “qualified wages” depends on the average number of employees a qualifying employer had in 2019. For large employers (employers whose average number of full-time employees was more than 500 in 2019), qualified wages are W-2 wages and health insurance plan allocable expenses paid to workers for periods when the worker is not providing services because the employer's business has been wholly or partially suspended or because the employer's gross income has fallen significantly. For small employers (employers with an average of 500 full-time employees in 2019 or less), qualified wages mean wages paid to every worker during a COVID-19 suspension of business operations or the significant decline in gross income, whether or not During this time, the employee does not provide any services. Qualifying wages are generally capped at $ 10,000 per employee per quarter. As mentioned above, there is no upper limit on the level of qualified wages for highly financially disadvantaged employers. Similar to the PSL and PFL rules discussed above, certain wages that are considered for certain other tax credit provisions are excluded from the definition of qualifying wages.
Application of the credit
The ERC is capped at the amount of applicable wage taxes on wages paid in the applicable quarter. To the extent that the otherwise provided amount of the ERC exceeds this amount, the excess will be treated as an overpayment which is available for reimbursement. Applicable employer taxes are defined as the employer's share of Medicare tax. This is a change from the CAA's treatment of the ERC, which applied the amount of the credit to the employer's share of social security tax.
As with the CAA, ERC prepayments are available for election to eligible employers whose average number of full-time employees in 2019 was no more than 500. These prepayments are capped at 70 percent of the average quarterly wage in 2019. Special rules apply to seasonal employers and employers who do not exist in 2019.
Extension of the limitation period for ERC
One potential dark cloud among all of the generosity afforded to employers by law: As with the PSL and PFL wage credit above, the statute of limitations for evaluating an amount attributable to a claimed ERC credit is extended is for five years.
Although the IRS recently issued guidelines on the ERC, those guidelines do not apply to the ERC for qualified wages paid after December 31, 2020. Future guidance on the ERC is expected for both the ERC provisions under the CAA (Q1 and Q2) by 2021) and in accordance with Section 3134 of the Code as enacted by law (Q3 and Q4 of 2021).
Extended definition of the insured employee under Section 162 (m) of the Code
Section 162 (m) of the Code generally denies corporate income tax withholding tax on compensation in excess of $ 1 million paid to officers of publicly traded companies referred to as insured employees. The law expands the group of employees who are considered to be insured employees. From 2027, the five most highly paid employees will also be included in the insured employees, excluding the employees who are considered insured employees without this new rule. While the status of an insured employee has recently been changed to include employees who were previously an insured employee, this perpetual designation does not apply to employees who are considered insured employees under this new rule.
Jackson Lewis P.C. © 2020National Law Review, Volume XI, Number 74