by Andreas Petrou, CPA
Now that the Consolidated Appropriations Act of 2021 (The Act) has been finally signed into law, we can look into the changes of the Employee Retention Credit (ERC). Before The Act was signed, the ERC could only be claimed by employers who did not participate in the Paycheck Protection Program (PPP). The Act changed the eligibility rules to include employers who participated in the PPP, and even went a step further to make those changes retroactive to March 12, 2020. Thus, this enables employers to go back and claim the credit for 2020, with one important exception. The exception is wages and/or health care costs used to calculate an ERC, are not eligible to be forgiven as part of the PPP. While a taxpayer may claim both, the ERC and borrow a PPP loan, they CANNOT do it on the same wages and/or health care costs.
There are many more changes in The Act that apply to the ERC, and here are some of the most notable changes:
The ERC has been extended through June 30, 2021 instead of December 31, 2020 as originally stated. Also, for 2021, the percentage of “qualified wages” to be used as a credit has increased from 50% of up to $10,000 of “qualified wages” paid per employee for tax year 2020, to 70% of up to $10,000 of “qualified wages” paid per quarter for tax year 2021.
Lastly, to be eligible for the credit in 2020 and 2021 an entity must satisfy one of two tests as follows:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- a significant decline in gross receipts.
The significant change in the test for 2021 from 2020 is the gross receipts test. For 2020, to satisfy the gross receipts test, an entity’s gross receipts must have been reduced by at least 50% in a quarter versus the same quarter in 2019. In 2021, to satisfy the gross receipts test, the reduction is 20%, instead of the original 50%.
The original law noted, employers with 100 or fewer full-time equivalent (FTE) employees during 2019 can claim the ERC on all wages paid to employees during a period in which the employer fulfilled the shutdown test or the gross receipts test. Employers with more than 100 FTE employees during 2019 could claim the ERC only on wages paid for nonworking periods triggered by a government shutdown order or a decline in gross receipts. For 2021, The Act increases the small employer threshold from 100 to 500 FTE employees.
As it is stated now, in The Act, “certain amounts from earlier quarters may be claimed in the quarter in which the Disaster Relief Act is enacted (i.e., the fourth quarter of 2020).” So, for an employer that received PPP monies, and has enough “qualified wages” to claim the ERC as well, will not have to file amended Form 941 returns, but instead calculate a “catch-up” credit amount to be listed on the 4th quarter Form 941 filing. Consulting with payroll providers on how to claim the credit will be necessary.
Tax considerations must be made to ensure the ERC is advantageous overall. Many factors should be considered, including, but not limited to, calculating the “qualified wages” for 2020, and determining that taking advantage of the ERC will not impact PPP forgiveness.
Should you have any questions or would like to schedule a meeting with us to discuss the impact of The Act on you and your business, please click HERE to contact us.
