While PPP 2 grabs the headlines and businesses scramble to figure out if they can qualify for additional forgivable loans, another key benefit from the Consolidated Appropriation Act of 2021, shouldn’t be overlooked. The expansion of the Employee Retention Credit (ERC) has both retroactive benefits related to the credit for 2020 as otherwise applied under the CARES act and an extended version of the credit for 2021 with new, expanded eligibility and amounts of credit available.
The Consolidated Appropriation Act of 2021, or just The Act as I’ll call it here, included a six month extension for the ERC through June 30, 2021. The ERC is a refundable credit against employer payroll taxes. Employers are eligible, if there was a part of the business shut down due to a government mandate or if they had a decline in gross receipts.
The ERC existed under the CARES act and applied to quarters in 2020. The extension under this act covers January 1 through June 30, 2021 and has some new rules and limits. However the act also provided some retroactive rules that go back to the application of the ERC for 2020. As of writing this there has been some disagreement in tax editorial circles as to whether just some or all of the expanded features were intended in the Act to be retroactive. So in this discussion, I’ll take the conservative approach in talking about the benefits we know for sure this Act provides retroactively to the the 2020 period and then I’ll discuss those that seem to be only applicable to the extended 2021 period, with the caveat that we could be presently surprised if further guidance provides that everything discussed here is retroactive.
Also as of writing this, we don’t have guidance on the logistics behind coordinating the filing of PPP loan forgiveness and the ERC. So it would be prudent to wait on filing for PPP forgiveness until further guidance is published, if the ERC is a possible benefit for your company.
ERC in 2020 – Retroactive benefits
Under the CARES act, the credit you would claim related to 2020, was limited to a maximum of $5,000 per employee with qualified wages. This was computed as 50% of qualifying wages on a maximum of $10,000 for all calendar quarters. A business qualifies for credit if they had a partial or complete shut down, due to a government mandate, or if they had a greater than 50% decline in income from the same quarter in 2019. Under previous law, a business couldn’t claim this credit if they were already getting the PPP and so many businesses skipped an evaluation of this opportunity during 2020.
Among the retroactive changes made by the act were clarifying that group health plan expenses can be considered qualified wages even when no other wages were paid to any employee. If a company otherwise would have qualified for the credit and missed claiming it on these group health plan expenses, there is an opportunity to claim some additional credit. Also the Act amended the rules so that an employer who received PPP loans, can also claim the ERC as long as the wages used for the ERC are not paid for with forgiven PPP funds. This creates an opportunity to go back and claim the credit for 2020 for companies that didn’t do so previously because they were receiving PPP funds. It seems likely that the record keeping and supporting documentation will be a project, to execute on this.
ERC in 2021
An extended credit can be claimed for qualifying wages up to $10,000 for EACH quarter rather than for all quarters of the year. The credit is expanded to 70% making the maximum credit $7,000 per employee with qualifying wages per quarter. If claiming the credit for Q1 and Q2 in 2021, that will be a $14,000 credit per employee with qualifying wages.
Previously the ERC was only applicable to businesses with up to 100 employees. That threshold for the 2021 credit is now 500 employees.
Businesses still otherwise qualify if partially or completely shutdown due to government mandate or if they meet a decline in gross receipts test. A business with a 20% or more decline in gross receipts will qualify for the 2021 credit versus the requirement that they have a 50% of more decline for the 2020 credit.
It’s also now possible for a business that didn’t exist in 2019 to claim the credit by using quarters in 2020 for comparison.
This is a sizable benefit being afforded eligible small businesses and should be considered in coordination with the PPP.