On December 27, 2020 President Trump signed the Consolidated Appropriations Act, 2021 and while round two of the Paycheck Protection Program is getting all the attention, there are many important provisions under this new bill. Among the legislation contained in the new COVID-19 relief package, there were several updates made to a wide array of tax credits. This includes tax credits that were created by the Families First Coronavirus Response and CARES Acts. Many businesses took advantage of those credits and will now be able to continue doing so through part of 2021. This post will cover what you need to know.
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The new legislation contains a few updates relating to tax credits first introduced in the Families First Coronavirus Response Act (FFCRA).
Paid sick and family leave timeframes extended
Two provisions of the FFCRA have been extended: the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. The Consolidated Appropriations Act, 2021 extended both programs through March 31, 2021. The refundable tax credits available to employers to offset the cost of both of these leave types have also been extended through the end of March.
A quick refresher on these programs :
- The Emergency Paid Sick Leave Act (EPSLA) dictates that employees are entitled to up to 80 hours of fully paid sick leave if they are absent from work because they are sick with COVID-19; however, they are entitled to only two-thirds of their regular pay rate if they are absent because they caring for a family member with COVID-19 or a child who is home due to school closures.
- The Emergency Family and Medical Leave Expansion Act (Expanded FMLA) gives eligible employees up to 12 weeks of fully paid leave included in the total FMLA leave entitlement (not in addition to it). They also may be entitled to an additional 10 weeks at two-thirds of their pay rate, if certain circumstances apply.
EPSLA and expanded FMLA for self-employed individuals
In addition to the above leave expansions, individuals can elect to use their average daily self-employment income from 2019 rather than 2020 to compute the tax credits associated with expanded leave. These tax credits offset the federal self-employment tax in an amount equal to their qualified sick leave amount, or qualified family leave equivalent amount. This provision is effective as if it was included in the FFCRA originally. The IRS has answered FAQs specific to self-employed individuals, so if you have more questions, visit the IRS FAQ.
If you need more information on EPSLA or Expanded FMLA or the associated tax credits, the IRS has a dedicated FAQ to tax credits required by these new paid leave types.
Employee Retention Credit (ERC) modifications
The employee retention credits (ERC) (sometimes also known as employee retention tax credits and abbreviated as ERTC) originally created in the CARES Act are intended to give employers a break on the cost of keeping people employed during uncertain times for their business. The new COVID legislation both extends and expands the credit.
Updates to the credit amount
Beginning on January 1, 2021, and continuing through June 30, 2021, the credit will:
- Be available to offset 70% of each employee’s qualified wages (up from 50%).
- Offset qualified wages up to $10,000 per employee per quarter (up from $10,000 per year).
- Allow group health plan expenses to be considered qualified wages, even when no other wages are paid to an employee.
This means that the maximum amount of ERC available per employee is $14,000 ([$10,000 for Q1 + $10,000 for Q2] x 70%).
Updates to eligibility
Eligibility updates, effective January 1, 2021:
- Your company must have had a decline in gross receipts or more than 20% (down from 50%). You can also now use prior quarter gross receipts to prove a decline (instead of receipts from the same quarter last year).
- “Qualified wages” for employers with 500 or fewer full-time employees include all wages paid to employees during those quarters (up from 100 full-time employees).
- “Qualified wages” for employers with more than 500 full-time employees is defined as: wages paid to employees for the time they are not providing services during a quarter where the business operations are fully or partially suspended due to COVID-19 circumstances (up from 100 full-time employees).
- New rules have been created which allow new employers (started in 2019 or later) to be able to claim the credit.
Retroactive updates to eligibility:
- If you received a Paycheck Protection Program loan from the first round, you may still qualify for the ERC with respect to wages that are not paid for with PPP proceeds.
ERC for disaster zones
The new bill extends the disaster ERC tax credit of 40% of wages (up to $6,000 per employee) to employers in disaster zones. This credit applies to wages paid without regard to whether services associated with those wages were performed. This relief is eligible for businesses in Presidentially declared disaster areas for major disasters—other than COVID-19—declared after December 31, 2019, through 60 days after the bill is enacted.
Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) updates
For the 2020 tax year, individual taxpayers can choose to use their earned income from the 2019 tax year to determine their Earned Income Tax Credit (EITC) amount, and their Additional Child Tax Credit (ACTC) amount for the tax year 2020. Head here for more information about the EITC.
Other extended tax credits
Tax credits extended for five years (through 2025)
- New Markets Tax Credit
- Work Opportunity Tax Credit