Dear Clients and Friends:
The Consolidated Appropriations Act, 2021 extends and expands the Employee Retention Credit (ERC) first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The ERC was enacted by the CARES Act for qualified wages paid after March 12, 2020 through December 31, 2020. The Act extends and expands the eligibility for the refundable ERC for qualified wages paid between December 31, 2020 and July 1, 2021.
Just as was the goal of the Paycheck Protection Program (PPP), the ERC is designed to encourage employers to continue to pay employees during the economic downtown. Only instead of a forgivable loan, the benefit is in the form of a payroll tax credit.
The ERC is a refundable tax credit against certain employment taxes. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Eligible employers may claim the credit against employment taxes equal to a percentage of qualified wages paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts.
Calendar Quarters Beginning After December 31, 2020 –
For calendar quarters beginning after December 31, 2020, the amount of the credit is increased from 50% to 70% of qualified wages. The limitation per employee is also increased from amounts paid up to $10,000 per year to amounts paid up to $10,000 per quarter. Eligible wages are wages paid between March 12, 2020, and July 1, 2021, extended from January 1, 2021.
In addition, the definition of an eligible employer is more inclusive under the Consolidated Appropriations Act, 2021 and thereby allows a greater number of employers to qualify.
An eligible employer is defined as:
- An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); OR
- An employer that experiences a 20% decline (down from 50%) in gross receipts for the calendar quarter compared to the same quarter in 2019.
However, if the employer was not in existence as of the beginning of the same calendar quarter in 2019, then the employer may use the same calendar quarter in 2020. Employers also have an election to determine if they meet the gross receipts test based on the immediately preceding quarter. Qualified wages are based on the business’s average number of full-time employees in 2019.
- Small employers, those that had 500 or fewer employees (up from 100), may receive the credit for wages paid to employees whether or not they are providing services to the employer.
- Large employers, those that had more than 500 (up from 100) employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. They can also request an advance of the employee retention credit by submitting Form 7200.
No Double Benefit –
There are limitations when considering an eligible employer’s ability to claim the employee retention credit. This credit is impacted by other credit and relief provisions as follows:
- wages that are paid for with forgiven Payroll Protection Program (PPP) proceeds cannot qualify for the employee retention credit;
- qualifying wages for this credit cannot include wages for which the employer received a tax credit for paid sick and family leave; and
- employees are not counted for this credit if the employer is allowed a work opportunity tax credit.
Because of the enhancements and expansion of the ERC, your business may now have an opportunity to take the advantage of this tax benefit. Please call our office to discuss the ERC and other business tax relief under the Consolidated Appropriations Act, 2021.
DUFFY KRUSPODIN, LLP
The table below summarizes the other key differences between the ERC for 2020 and 2021.
2020 (All Year)
2021 (Q1 or Q2)
|Eligibility based on reduction in gross revenue
Starts when there is a 50 percent drop in gross receipts in 2020 quarter compared to the same quarter in 2019; eligibility ends the earlier of (1) first quarter after the quarter in which the business has gross receipts of 80 percent of what the business had in the same quarter in 2019 or (2) December 31, 2020.
|Starts when there is a 20 percent drop in gross receipts in the applicable 2021 quarter compared to the same quarter in 2019.
|Ability to use the prior quarter to determine eligibility for the current quarter based on revenue drop
|Yes. 20 percent drop in 4Q 2020 compared to 4Q 2019 ensures eligibility for 1Q 2021. 20 percent drop in 1Q 2021 compared to 1Q 2019 ensures eligibility for 2Q 2021 (as well as 1Q 2021).
|Employer Size for Whether an Employee is Working or Not:
||A company with more than 100 employees could not take the credit for wages paid to an employee performing services for the employer (either teleworking, or working at the workplace, even though at reduced capacity due to reduction in business).
A company with 100 or fewer employees was eligible for the credit, even if the employee was working.
|Beginning January 1, 2021, the threshold increases to 500.
An employer with 500 or fewer employees will be eligible for the credit, even if employees are working.
When calculating the 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated.
|Amount of credit
||50 percent of wages paid during eligibility, up to wages of $10,000 per year per employee.
||70 percent of wages paid in the quarter, up to $10,000 of wages per employee per quarter.
$5,000 per employee.
$14,000 per employee.
|PPP Loan Interplay
||REPEALED – A company that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit.
This disallowance rule extended to all affiliated companies that shared common ownership, so that if one company received a PPP loan, any other company with more than 50% common ownership was ineligible to claim the credit.
|This change is retroactive to the effective date under the original law for wages paid after March 12, 2020.
A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit.
The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.
A company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively. The IRS is expected to issue guidance on how to claim the credit retroactively.
Companies related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively, if they are otherwise eligible for the credit.