In addition to the welcome news for PPP loan recipients that associated qualified expenses are in fact tax-deductible, the Consolidated Appropriations Act (CAA) substantially expands Employee Retention Credit (“ERC”) benefits. Some employers may now be eligible to retroactively claim the credit on qualified wages going back to March 12, 2020. We expect many more companies will be eligible for the ERC under the expanded rules during the first two quarters of 2021.
What Changed in the Employee Retention Credit
The ERC as it existed under the CARES Act was not available to taxpayers who received a PPP loan. Provisions in the CAA remove this barrier and allow companies that qualify to retroactively apply for the credit so long as the same wages are not used for both. Careful planning is critical for maximizing the benefits under both programs – and keep in mind that more guidance from the IRS is expected (and needed).
Determining ERC Eligibility & Benefits
Calculations for determining benefits can be complex; the first step is to determine if eligibility requirements are met based on a decline in gross receipts. During 2020, if your business was fully or partially suspended by a COVID-19 government order – OR – if gross receipts were less than 50% compared to the same quarter in 2019, you’ll want to continue investigating any retroactive benefits.
Beginning January 1, 2021, the ERC is available to businesses with operations that were suspended due to government order – OR- that experience a decline in gross receipts during the first two quarters of 20% or more compared to the same two quarters in 2019. We expect many more companies to be eligible under the expanded rule. Provisions are available for companies that were not in existence during 2019, and the credit is available for tax-exempt entities as well.
Employer Size and FTEs
The next step in determining eligibility is measuring employer size by full-time equivalents (FTEs). For 2020, a business with more than 100 FTEs cannot take the credit for wages paid to an employee still performing services (even in a reduced capacity or working from home). Consequently, an employer with fewer than 100 FTEs is eligible for the credit, even if the employees were still working. Beginning January 1, 2021, the FTE threshold of 100 is replaced by 500 – which means more mid-sized companies can qualify on a go-forward basis.
An Increased Cap for 2021
For 2020, the credit is equal to 50% of the qualified wages paid to an employee, plus the cost of health benefits with an annual cap of $5,000 per employee. Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of the year ($10,000 in qualified wages x 70%) times two quarters for a possible $14,000 credit per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit on the same employee in 2020.
More Possibilities for More Businesses & Organizations
Historically, the limited availability of the ERC kept it off the radar for most companies. The CAA substantially enhances the eligibility requirements, extending to employers with up to 500 employees – which should allow many more employers to qualify going forward. Careful planning and evaluation are critical to maximizing the benefits, so consult your accounting professional to ensure you’re making the most of your opportunities.
Again, more guidance is needed and expected, but it’s not too early to start mapping opportunities and planning your approach. If you have questions or want to review what the new legislation may mean for you, contact us – we’re here to help.
You can also keep up-to-date with our COVID-19 Advisory Resources for continued analysis of the CAA and other related matters.