January 26, 2021
In an effort to provide more COVID-19 relief, the Consolidated Appropriations Act (the Act) signed into law in late 2020 extends the employee retention tax credit (ERC) under the CARES Act through June 30, 2021 and expands potential benefits under the ERC. As part of weighing federal stimulus options to support their organization through the uncertainties of the pandemic, employers should consider whether they qualify for the ERC and whether ERC benefits are available to them retroactive to 2020.
The ERC was originally available in 2020 for employers with a with a 50% decline in gross receipts in any quarter of 2020 compared to the same quarter of 2019. Employers who had operations suspended due to government restrictions are also eligible for the ERC, regardless of gross receipts comparisons. However, if a physical office was closed due to government orders but employees were able to work remotely, this does not count as a suspension for ERC eligibility.
The credit in 2020 is available until the quarter after gross receipts are 80% of the same quarter in 2019 or January 1, 2021, whichever is earlier. The credit in 2020 is 50% of qualified wages paid capped at $10,000 per employee (maximum credit to $5,000 per employee) paid before January 1, 2021. The ERC was not previously available to employers that had received PPP loans.
The CAA extends the ERC to qualified wages paid until June 30, 2021, increases the potential credit, reduces the drop in gross receipts threshold and allows PPP loan recipients to qualify for the credit.
Effective January 1, 2021, the 2021 ERC is available to eligible employers with a 20% decline in gross receipts in any quarter of 2021 as compared to the same quarter in 2019. Also, employers can elect to compare the fourth quarter of 2020 as compared to the fourth quarter of 2019. The maximum amount of the credit was increased to 70% of $10,000 qualified wages paid to an employee for each of the first two quarters of 2021, for a maximum credit per employee in 2021 of $14,000.
In 2020, employers with greater than 100 employees could only take the credit for employees not providing services. In 2021, employers with 500 or fewer employees can take the credit for all employees whether or not they provided services. For employers with between 100 and 500 employees, this may provide a significant increase in ERC for 2021.
PPP Loans and the ERC
The expansion and extension of the ERC is particularly helpful to PPP loan recipients that were previously ineligible for the ERC. As long as these employers meet the gross receipt decline test or business operations suspension test described above and do not claim the ERC on wages covered by a PPP loan, they are now eligible to receive a credit of up to $5,000 per employee for 2020 and $14,000 per employee for 2021. When the PPP loan covered period for forgiveness was expanded from 8 weeks to 24 weeks, many employers may have calculated forgiveness using just wages rather than other qualifying cost (e.g. rent or utilities). For those that have already applied for forgiveness, there is some question as to how they may qualify for the ERC retroactively in 2020. Employers that have not yet applied for forgiveness should evaluate their calculation of eligible PPP expenses to take into account the eligibility for the ERC. The AICPA has requested clarification from the Small Business Administration in order to mitigate this issue for employers that filed for PPP forgiveness early. We expect additional guidance on how wages paid by PPP loan recipients impact the ERC qualification.
Employers who believe they qualify or would like to calculate eligibility for the ERC should contact their CPA for assistance. GRF CPAs & Advisors’ COVID-19 Response Team will continue to provide updates as information becomes available. Resources are available to the general public through GRF’s COVID-19 Response page. For questions about the PPP, ERC and other relief provisions, contact us at firstname.lastname@example.org.