On December 27, 2020, President Trump signed a number of bills, including one that breathes new life into the Employee Retention Credit (ERC). While the headline was that employers receiving Payroll Protection Program (PPP) loans could now also claim the ERC, did you know the credit was significantly enhanced? Especially in 2021, we see the expanded credit as an incredible opportunity for employers.
Understanding the Old Law
Established by the CARES Act, the Employee Retention Credit was designed to incentivize employers to maintain their payroll during the coronavirus pandemic. For the period from March 13, 2020 to December 31, 2020, eligible employers could claim a 50% retention credit for qualified wages. Eligible employers included:
- Businesses that were fully or partially suspended due to a governmental order or
- Businesses that had a reduction in gross receipts of 50% or more during a calendar quarter, as compared to the same calendar quarter in 2019.
Qualified wages for employers of less than 100 full time equivalent employees consisted of any wages paid, assuming the business met one of the above tests. For employers of more than 100 full time equivalent employees, qualified wages were only those wages paid to employees for not working.
Annual qualified wages per employee were capped at $10,000, meaning a potential annual credit of $5,000 per employee. It should be noted that any payroll costs used on the PPP loan forgiveness application cannot be claimed as ERC creditable wages.
Understanding the New Law
Effective from January 1, 2021 to June 30, 2021, the eligibility requirements have changed. Now, businesses that had a reduction in gross receipts of 20% or more during a calendar quarter as compared to a prior quarter will qualify for the ERC. The comparison is between 2021 results and 2019; additionally, the immediately preceding quarter results can be used to determine eligibility. For example, for the first quarter of 2021, an employer could compare fourth quarter 2020 results to fourth quarter 2019 results for determination of the reduction in gross receipts.
The good news doesn’t stop there! The 100 full time equivalent employee rule noted above was changed to a 500 full time equivalent employee requirement. This means employers of between 100 to 499 full time equivalent employees can include any qualified wages paid, not just wages paid for not performing services. Qualified wages are also clarified to include qualified health plan expenses.
Finally, the credit has been expanded. Qualified wages per employee are now $10,000 per quarter, instead of per year. The credit rate is now 70% of qualified wages, instead of 50%.
It’s important to note that similar to the prior provisions, payroll costs used on a PPP loan forgiveness application cannot be claimed as ERC creditable wages.
How to Plan for the Employee Retention Credit
As a business owner, we expect that you are already aware of the heightened urgency in closing your accounting books in a timely manner to prove a reduction in gross receipts. Both the second round of PPP loans and the ERC require you to show a precipitous drop in your gross receipts. Timely financials will allow you to determine your eligibility more quickly, and perhaps speed up the receipt of additional loan funds and/or tax credits.
As the ERC is based on qualified wages that are not also claimed on the PPP loan forgiveness application, care should be taken in determining the costs deemed paid with PPP funds. However, for those businesses that have already filed for forgiveness, there continue to be questions on the interplay of the ERC and PPP. We will look out for developments as it relates to the payroll costs used for both ERC and PPP, as well as how to claim retroactive credits.
The Employee Retention Credit is an exciting development for businesses. Please contact us if you’d like to discuss the potential credit to your business.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for the most recent information.