The Consolidated Appropriations Act, 2021 (the “Act”), which was signed into law a few weeks ago, extends and modifies the employee retention credit (“ERC”) to permit more taxpayers to take advantage of it. The ERC is a payroll tax credit available to taxpayers affected by the COVID-19 pandemic; it was created by the CARES Act back in March of 2020.
Retroactive Relief – ERC and PPP
Originally, the ERC was only available for qualified wages paid through December 31, 2020 and was not available to PPP borrowers. Fortunately, the ERC has been extended to June 30, 2021, so taxpayers can also claim the credit in Q1 and Q2 of 2021. The characteristics of the 2021 ERC are more taxpayer-friendly than the 2020 ERC; these modifications are discussed in the section below.
Moreover, the Act provides that PPP borrowers may also claim the ERC, which was not the case before. However, it is important to note that both PPP funds and the ERC cannot be used for the same wages; in other words, forgivable payroll costs for PPP do not include qualified wages upon which the ERC is computed.
This change appears to be retroactive to March 12, 2020. It is uncertain at this time how taxpayers will claim the retroactive credit. For example, this could be done by filing amended employment tax returns. We expect the IRS to address this issue soon.
Modifications – 2021 Credits Only
First, for 2021 quarters, the credit amount is increased to 70% of qualified wages from 50%. Second, the maximum amount of qualified wages that may be considered for the credit is $10,000 per employee per quarter instead of $10,000 per employee in total. Note, any computational changes discussed in this section only apply to credits claimed for 2021 quarters.
Notably, the first step in claiming the ERC is determining eligibility. For the most part, the tests are the same: a taxpayer becomes eligible for the credit when (1) its business operations are fully or partially suspended by a government shutdown order; or (2) it sees a significant drop in gross receipts compared to 2019.
Application of the first test is complex and involves a careful analysis of different factors, such as whether the taxpayer is an essential business and whether employees can feasibly work from home. The second test is easier to decipher. For 2020 credits, the taxpayer must see a 50% drop in gross receipts when comparing any quarter in 2020 to the same quarter in 2019. For 2021 credits, the drop need only be 20%.
Finally, for 2020, taxpayers with more than 100 full-time employees could only claim the ERC with respect to employees that were not providing services during the time of economic hardship (i.e., shutdown or drop in gross receipts). Taxpayers with 100 or less could claim the credit for each employee, regardless of whether they were working or not. For 2021, the 100-employee threshold is increased to 500, which permits “bigger” businesses to claim a bigger credit.
For example, a taxpayer with 50 full-time employees that saw business operations shut down during the pandemic or saw a drop in gross receipts may qualify for a payroll tax credit of up to $250,000 in 2020 and $700,000 in 2021. Even better, any credit amount that exceeds their payroll tax liability will be refunded to them. If the taxpayer spent $100,000 of its $150,000 PPP loan on wages last year, then the 2020 credit would be $100,000, to avoid a double benefit.
Note, taxpayers should be mindful of the aggregation rules, which provide that related entities under common ownership are considered one employer for purposes of the three eligibility tests (i.e., shutdown order, drop in gross receipts, and 100 or 500 employee threshold). Please consult a tax advisor to determine eligibility.
SingerLewak is available to assist you in determining the amount of your potential ERC for 2020 and 2021 and claiming those credits. You still have until January 31, 2021 to claim any credits for Q4 of 2020. For any tax-related questions specific to this Tax Alert, please contact your tax compliance team or any of the following individuals:
Name: Meghan Andersson, JD, LLM, CM&AA
Office: Irvine, CA
Phone: (949) 623-0542
Name: Jason Borkes, CPA, CM&AA
Office: Irvine, CA
Phone: (949) 623-0516
Name: Mark Cook, MBA, CPA, CGMA
Office: Irvine, CA
Phone: (949) 623-0478