Employee Retention Credit Expanded under Consolidated Appropriations Act: Now Available to PPP Loan Recipients and Extended to 2021

Buckingham, Doolittle & Burroughs, LLC
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Buckingham, Doolittle & Burroughs, LLC

At the end of 2020, Congress passed another round of Covid-19 relief in The Consolidated Appropriations Act, 2021 (CAA). The CAA provides for some key tax-advantaged stimulus measures, such as a second round of PPP loans allowing deductions for expenses paid with forgiven loans, and now an expansion of the Employee Retention Credit (ERC) giving employers a further incentive to keep workers on the payroll.

The new law retroactively amended the ERC to allow PPP loan recipients to claim the ERC for 2020 wages and expanded the ERC for the first half of 2021. PPP loan recipients can now maximize their economic benefit by seeking full PPP loan forgiveness and claiming the ERC for wages not claimed as part of their forgiven PPP loan.

ERC available to PPP loan recipients for wages paid from March 12 through December 31, 2020.

Businesses are eligible for the credit on 2020 qualified wages for periods where the business was fully or partially suspended by a government order or for periods with a significant decline in quarterly gross receipts. Generally, the eligible period is defined as follows:

  • Begins: First quarter in 2020 where the business’ gross receipts declined by more than 50% compared to the same quarter in 2019; and
  • Ends: The earlier of: (1) December 31, 2020; or (2) the end of the quarter where the business’ gross receipts returned to at least 80% of gross receipts for the same quarter in 2019.

In other words, if gross receipts for Q2, Q3, or Q4 of 2020 were less than 50% of gross receipts compared to the same quarter in 2019, the business will be eligible to claim the credit for qualified wages paid through the end of 2020. Accordingly, the ERC can be claimed for wages paid after PPP loan proceeds received earlier in the year had been exhausted.

If the above requirements are met, employers can claim a credit of 50% of the qualified wages paid to an employee plus the cost of providing the employee’s healthcare. The maximum credit for 2020 is $5,000 per employee (50% of $10,000 in qualifying wages). Employers can “catch up” on unclaimed credit by claiming the ERC on its 4th quarter 941 or file amended 941s for previous quarters.

The amount of “qualified wages” an employer can claim as a credit depends on the average number of full-time employees for 2019. For an employer that averaged more than 100 full-time employees, qualified wages are wages paid to employees for not providing services, such as employees on furlough. However, employers averaging 100 or fewer full-time employees, qualified wages include all wages, whether the employee is working or not. Essentially, large employers can only claim the credit for wages paid for employees who were not able to work, while small employers can claim the credit for all wages paid during the applicable period. 

ERC extended for wages paid during first half of 2021.

Beginning January 1, 2021, the threshold for determining a decline in gross receipts is raised to expand eligibility. Under the new law, the credit is available if the business experienced at least a 20% reduction in gross receipts for Q1 or Q2 of 2021 compared to the same quarter in 2019 (rather than 50% for 2020). Further, the allowable credit is increased to 70% of qualified wages plus the cost of providing health benefits, up to a maximum of $7,000 per employee per quarter in 2021 (up to $14,000 per employee for 2021).

In addition to the gross receipts reduction, the employee threshold for determining qualified wages for the 2021 ERC was increased to 500 full-time employees. In other words, employers that averaged fewer than 500 full-time employees in 2019 can claim the credit for all wages paid, while larger employers can only claim the credit on wages paid to employees for not working. Eligible businesses may claim the credit by reducing their federal employment tax deposits realizing an immediate cash benefit.

Buckingham’s business and tax attorneys continue to monitor the available federal and Ohio stimulus benefits available to small and mid-sized businesses. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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