New Law Clarifies and Expands CARES Act Employee Retention Credit
On December 27, 2020, President Donald Trump signed into law the $900 billion COVID-19 relief bill passed by Congress on December 21, 2020. The legislation (Consolidated Appropriations Act, 2021), adds $300 to extended weekly unemployment benefits and provides more than $300 billion in aid for small businesses.
One provision permits employers to retroactively claim the Employee Retention Tax Credit (ERTC) for 2020 even if the business received a PPP Loan. The payroll tax credit for 2020 is equal to 50 percent of qualified wages paid to each employee after March 12, 2020, and before January 1, 2021; qualified wages are limited to $10,000 per employee, effectively capping the 2020 credit at $5,000 per employee. The Act also extends and expands the credit for 2021, allowing employers to claim the credit for wages paid between January 1, 2021, and before July 1, 2021. The 2021 credit was expanded by not only increasing it from 50 percent to 70 percent of qualified wages, but it can also be claimed per quarter, resulting in a potential credit of $7,000 per employee, per quarter ($14,000 for Q1-Q2 of 2021).
Wages paid with PPP funds or other subsidies would not count toward this valuable credit. Previously, businesses that received the PPP loan were not eligible for the ERTC.
According to the IRS, to be eligible for the ERTC:
Employers, including tax-exempt organizations, are eligible for the credit if they operated a trade or business during calendar year 2020 and experienced either:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A significant decline in gross receipts.
For 2020, a “significant decline” in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. For the 2021 credit, the Act reduced that threshold to 80 percent. The Act also provides a safe harbor allowing employers to use the prior quarter gross receipts to determine eligibility for the 1st and 2nd quarter in 2021. The “significant decline” in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80 percent of its gross receipts for the same calendar quarter in 2019.
The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended after March 12, 2020, and before July 1, 2021.
Since the ERTC is now available to recipients of the PPP loan, an employer should consider claiming as much as it can in an allowable facility and other non-payroll costs when applying for PPP loan forgiveness to maximize the wages available for this valuable $19,000 per employee payroll tax credit.
We invite you to contact us if you want to learn more about this credit, determine if you are eligible, and calculate your potential credit.