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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 claim the Employee Retention Tax Credit (ERTC) of up to $5,000 per employee even if the business received a PPP Loan. The payroll tax credit is equal to 50 percent of the first $10,000 of wages paid per quarter to each employee after March 12, 2020, and before January 1, 2021. For wages paid between January 1, 2021, and before July 1, 2021, the credit is increased from 50 percent to 70 percent of qualified wages.

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:

  1. 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
  1. A significant decline in gross receipts.

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 80 percent of its gross receipts for the same calendar quarter in 2019. The act now provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility. 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 $5,000 per employee payroll tax credit.

We recommend an eligible employer work with its payroll service or CPA to apply for this payroll tax credit. If you have any additional questions as to how the new legislation affects you or your small business, please contact us.

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