On December 27, 2020, former President Trump signed into law The Consolidated Appropriations Act, 2021 (CAA21), which contains several tax law changes, including expanded eligibility for the Employee Retention Credit (ERC) for businesses whose PPP loan(s) made them ineligible. Now, eligible businesses can retroactively claim the ERC for 2020. The new CAA21 legislation will also allow the ERC to be extended through June 30, 2021.
The ERC, originally included in the CARES Act of 2020, was made available to employers who were significantly affected by the COVID-19 pandemic. The credit initially provided a 50% refundable tax credit for companies closed or partially suspended due to a COVID-19 lockdown, or for companies who continued to pay their employees despite suffering a significant decline in gross receipts due to loss of business. At that time, businesses (or business affiliates) who received a PPP loan were ineligible for the ERC.
The CAA21 has expanded ERC eligibility to allow previously ineligible businesses to retroactively claim the credit for qualified wages paid after March 12, 2020. However, credits may not be claimed on wages paid with the proceeds of a PPP loan that has since been forgiven.
The difficulty will be for borrowers who have applied for PPP loan forgiveness with more allowable costs than their loan principal. Borrowers will have to carefully look at their records, as well as the loan forgiveness criteria, to determine if they can take advantage of both loan forgiveness and the ERC. S&K realizes this can be a complicated and confusing process – so feel free to reach out to us for assistance.
Eligible employers may now be able to file amended 2020 employment tax returns to claim the credit for qualified wages, if their business meets the ERC eligibility requirements. Eligible businesses may now include:
- Companies who received a PPP loan in 2020 and paid qualified wages in excess of wages used in the PPP loan forgiveness calculation and/or
- Companies related to a PPP borrower that did not claim the credit because an affiliated company (which shares common ownership) received a PPP loan.
Businesses that did not originally claim the credit due to the previously disqualifying reasons listed above should review the credit requirements to determine if they may be eligible now.
Updated Employee Retention Credit Calculation for 2021
In addition, the CAA21 provides significant ERC calculation updates for all eligible employers effective January 1, 2021:
- The credit availability has been extended from December 31, 2020 to June 30, 2021 allowing for an additional two quarters in 2021.
- The credit percentage is increased from 50% to 70% of qualified wages for 2021. ($10,000 qualified wages x 70% rate = $7,000.)
- Separate $10,000 qualified wage caps apply for the first two quarters of 2021, rather than a single $10,000 cap for the entire year. The maximum ERC for 2021 is $14,000 per employee for the first and second quarter, or $7,000 maximum credit per quarter. (For 2020, the maximum ERC was $5,000 per employee for the year – 50% of $10,000 qualified wages.)
- Any employer with a reduction in gross receipts of 20% for 2021 (the original threshold was 50%) can take advantage of the ERC and, for purposes of calculating the reduction in gross receipts, an employer can use its prior-quarter gross receipts compared to the corresponding 2019 quarter to determine eligibility.
- The threshold of 100 full-time equivalent (FTE) employee is increased to 500 FTE employees for the period from January 1, 2021 to June 30, 2021. Previously, the ERC applied to all employee wages paid by an employer with 100 or fewer employees, while employers with more than 100 employees could only include wages paid to employees not performing services due to the business suspension or significant decline in gross receipts.
- Qualified wages for purposes of the ERC originally could not exceed the amount an employee would have been paid for working an equivalent number of hours during the 30 days immediately preceding the applicable period. This restriction is eliminated for 2021 wages, allowing employees to include bonus pay or severance as qualified wages.
- Employer paid group health care cost may be treated as qualified wages, even if the employee did not receive any “regular” wages during the same period
In addition, the IRS will be providing guidance for employers with 500 or fewer employees to allow advance payment of the credit based on 70% of average quarterly payroll for the same quarter in 2019. Then, if the amount of the actual credit at quarter-end is less than the advance payment received, the employer will need to repay the over payment.
S&K is here to answer any questions you might have about changes to the Employee Retention Credit program and/or PPP loans. If you feel your business might qualify for these programs – please contact us today!