The enactment of the 2021 Consolidated Appropriations Act created more opportunities for using the Employee Retention Tax credit (ERC). The original ERC is a provision of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). It provides a refundable payroll tax credit to companies that meet the various criteria. The appropriations act, signed into law on December 27, 2020, makes several modifications to the ERTC for 2021 and one critical retroactive change.
Now, companies that received a Paycheck Protection Program (PPP) loan in 2020 may also qualify for the ERC. To prevent “double-dipping,” taxpayers may not include wages that were forgiven under the PPP forgiveness provisions as an eligible wage. However, amounts paid that were either not forgiven or are over and above the PPP loan amounts can be included for ERC purposes.
In the future, the ERC is available for qualified wages paid before July 1, 2021. The CARES Act initially only provided credit for these qualified wages between March 12, 2020, and January 1, 2021. Now the ERC has been enhanced in the following ways for Q1 and Q2 of 2021:
- Credit percentage increases to 70% of qualified wages (from 50%)
- Qualified wages increase to $10,000 per quarter (from $10,000 total in 2020)
- Threshold to be considered a large employer increases to 500 employees (from 100)
- Threshold for qualification due to “significant decline in gross receipts” decreases to 20% (from 50%)
Under these new guidelines, the maximum ERC for 2021 is $14,000 per employee ($7,000 per quarter). This is a substantial increase over the $5,000 maximum ERC that was available for all of 2020.
2020 Example: Company A employs 25 people and received a PPP loan that was forgiven. Company A’s gross receipts decreased by more than 50% in Q3 2020 when compared to Q3 2019. In Q4 2020, the company’s gross receipts still had not recovered to 80% of Q4 2019. After removing wages paid by the forgiven PPP loan, the company determines qualified wages and health plan expenses are still more than $10,000 per employee.
- Original CARES Act Opportunity: $0 – Since Company A’s PPP loan was forgiven, it was not allowed to claim an ERC in 2020.
- New Opportunity: $125,000 – Since Company A had 2020 qualified wages and other qualified expenses of $10,000 beyond the forgiven PPP amounts, the maximum credit per employee can be claimed is $125,000. (25 x $10,000 x 50% = $125,000)
2021 Example: Company A continues to employ 25 people in Q1/Q2 of 2021. Company A’s gross receipts remain 20% lower than those same quarters in 2019. Company A’s qualified wages and health plan expenses continue to total more than $10,000 per employee each quarter.
- Original CARES Act Opportunity: $0 – The original CARES Act limited the ERC program to 2020.
- New Opportunity: $350,000 – In Q1 the company is eligible for refundable payroll tax credit of $175,000. In Q2 the company can again receive a credit of $175,000. (25 x $10,000 x 70% = $175,000) Q1+Q2 = $350,000
The above examples illustrate the key differences between the ERC in 2020 and 2021. As with all new tax legislation, the ERC is subject to further legislative changes and other IRS clarifications and interpretations. While each company’s facts and circumstances are unique, and many factors can impact credit eligibility, the now expanded and enhanced ERC presents an opportunity to recoup valuable tax dollars to help weather the uncertainty that lies ahead in 2021.
For more information on the credit, visit our ERC Assistance page.
This article is for information purposes only and is not meant to be specific tax advice for any individual or organization. Please reach out directly to your tax professional about how the information in this article impacts your particular and unique situation.