Naya Pearlman, J.D., LL.M. and Nastassia Koyfman, J.D., LL.M.
1.20.21 | Client Alert
Employers have a new opportunity to claim the Employee Retention Credit (“ERC”) even if Paycheck Protection Program (“PPP”) loans are taken.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created the ERC to help businesses keep employees on payroll by providing refundable tax credits against the employers’ share of social security tax on quarterly payroll forms. Before the Consolidated Appropriations Act, 2021 (the “Act”) was signed into law, the refundable tax credit was limited to 50% of up to $10,000 in qualified wages per employee and in order for employers to qualify the employer must have operated a business that was financially impacted by COVID-19. The new Act not only increases the refundable tax credit amount for the 2021 tax year, but also liberalizes the eligibility requirements for 2021 and allows businesses to retroactively take advantage of both PPP loans and the ERC for 2020 and 2021 tax years.
Below is a summary of the ERC rules to keep in mind for each tax year.
The ERC applies to qualified wages paid by an eligible employer after March 12, 2020 and ending December 31, 2020. The maximum credit amount is capped at $5,000 per employee (50% of $10,000 in qualified wages) for all calendar quarters in 2020.
To be an eligible employer, the employer must operate a trade or business that either (1) was fully or partially suspended during any calendar quarter in 2020 due to a COVID-19 related shut-down order or (2) experienced a significant decline in gross receipts during a calendar quarter. For the 2020 tax year, a significant decline in gross receipts occurs when the employer’s gross receipts in any 2020 calendar quarter is less than 50% of its gross receipts for the same calendar quarter in 2019.
For employers with more than 100 full-time employees, qualified wages are counted only when paid to an employee for time when the employee is not providing services during the period described in (1) or (2) above. Only employers that averaged 100 or fewer full-time employees can claim qualified wages paid to any employee (working or not working) during the period described above.
The new Act extends the CARES Act employee retention credit by continuing the program through the first two quarters of 2021. It also increases the credit rate from 50% to 70% of qualified wages and increases the limit on creditable wages from $10,000 per quarter to $10,000 per calendar quarter for each employee. Accordingly, eligible employers can claim up to $14,000 of tax credits per employee in 2021 (or $7,000 per quarter).
To be an eligible employer in 2021, the employer must still operate a trade or business that either (1) was fully or partially suspended during a calendar quarter due to a COVID-19 related shut-down order or (2) experienced a significant decline in gross receipts during a calendar quarter. However, for purposes of 2021 qualification, a significant decline in gross receipts occurs when the employer’s gross receipts in any current or preceding calendar quarter is less than 80% of its gross receipts as compared to the same calendar quarter in 2019. In other words, the employer must show a more than 20% reduction in gross receipts to qualify.
In addition, beginning January 1, 2021, the ERC is available to businesses with 500 or fewer employees even if those employees are working. Only large employers with more than 500 employees are not eligible for the credit if the employees are working during the economic hardship periods described above. As a result of these changes, many more employers will be eligible for the 2021 ERC. For purposes of both the employee count and gross tests receipts, affiliation rules apply, and affiliated companies are subject to aggregation.
ERC and PPP Interplay
Under the new Act, companies that took PPP loans in 2020 are eligible to claim the ERC retroactively for qualified wages paid between March 12, 2020 and December 31, 2020, so long as the same wages are not counted as payroll costs for PPP loan forgiveness. If the PPP loan is not forgiven, however, wages can be treated as qualified wages for ERC purposes. Businesses may want to consider analyzing PPP expenses to ensure that PPP payroll costs are taken into account first on loan forgiveness applications before claiming ERC. In addition, both options (the second round PPP and new ERC) should be considered for wages paid during the first six months of 2021 (from January 1, 2021 through June 30, 2021).
While some questions still remain (such as whether employers will need to file amended 2020 payroll forms or whether there will be a catch-up on later filed forms to claim ERC for prior wages paid), we strongly encourage businesses to contact their tax advisors to determine whether their companies qualify for this new benefit. We expect additional guidance from the Treasury and the IRS on this important matter and will share updated information as it becomes available.
This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.