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The American Rescue Plan Act (ARPA) provides significant relief for businesses through expanded funding, and the renewal of federal loan and tax incentive programs. While Chicago has committed $146.6M in business loans and grants and is currently supporting more than 4,000 businesses, the ARPA is needed to help many to the other side of this pandemic. Initially when support began from the federal government, the popular Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) program were top of mind for many businesses. However, changes and continued evolution of the Employee Retention Credit (ERC) create an additional dimension of savings for businesses. To help clients, prospects and others, Selden Fox has provided a summary of the key details below.

Employee Retention Credit Updates

  • Deadline Extension – ARPA extended the ERC to include eligible wages and health benefit expenses through December 31, 2021. This is the second extension Congress has made to ERC following the initial 6-month extension approved in the Consolidated Appropriations Act (CAA).
  • Applicable Employment Taxes – Prior to June 30, 2021, the ERC is claimed against the employer’s share of Social Security taxes. However, the ARPA changes the definition of applicable employment taxes to the employer’s share of Medicare taxes owed per employee.
  • Eligibility – There were several changes made to eligibility which permits startups and financially disadvantaged companies to receive new or additional benefits. The current eligibility requirements which impact most businesses will remain the same. However, there are two important changes which include:
    • Recovery Start Up Businesses – These are businesses which started on or after February 15, 2020, have no more than $1M in average annual gross receipts in the last three years and are otherwise not eligible to claim the credit. These businesses will be eligible for an expanded credit maximum of $50,000 per quarter, even if there was no decline in gross receipts or suspension of operations.
    • Severely Financially Distressed – As the name suggests these are businesses that have suffered significant declines due to the COVID-19 pandemic. Any company that has experienced a quarterly decline in gross receipts of 90%, or more, when compared to the same calendar quarter of 2019, will be permitted to treat all wages paid as eligible for the credit regardless of the size of the employer. This is welcome relief for large employers facing tough conditions to claim employee wages regardless of whether services are being provided or not.
  • PPP Recipients – When the CARES Act was passed, a business that received a PPP loan was not eligible to claim the credit. However, this was changed by the CAA which permits the ERC to be claimed on qualifying wages not paid from PPP loan proceeds. The ARPA made an additional change disallowing wages paid for by the Restaurant Revitalization Program or Shuttered Venue Operators Grant from being included in the credit calculation.
  • Extended Enforcement – An atypical change was made to the statue of limitation rules under which the IRS is permitted to review ERC claims. The ARPA extended the review timeline to five years which means proper reporting, calculation and documentation of credit take on even greater importance.

Effective Date

The changes outlined above are effective July 1 through December 31, 2021.

Contact Us

The changes to the ERC are welcome news for many Chicago businesses facing ongoing pandemic challenges. Given the complexity of the program including the recent changes, it is important to consult with a qualified tax advisor to guide you through the process. If there are questions about the changes or if you need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Paul Rozek

Paul Rozek provides tax research, consulting and compliance services to closely held businesses, tax-exempt organizations, individuals and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions and other nonprofit entities.