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EXPANDED EMPLOYEE RETENTION CREDIT ELIGIBILITY

EXPANDED EMPLOYEE RETENTION CREDIT ELIGIBILITY

The recently signed stimulus bill brought big changes to the Employee Retention Credit (ERC). The CARES Act added the ERC which, under certain circumstances, provides a credit of up to $5,000 per employee for qualifying wages paid. However, there was one catch – an employer could not benefit from the ERC if they also had a Paycheck Protection Program (PPP) loan. This has changed with the passage of the Consolidated Appropriations Act, 2021, which contained the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”).

Before we get into the changes TCDTR made to the ERC, let’s take a high-level look at the ERC.

In order to qualify, the employer must meet one of two conditions:

  1. The employer must have fully or partially suspended operations during any calendar quarter in 2020 due to government orders. Wages paid during this time period would qualify for the credit, or
  2. The employer experienced a more than 50% decline in gross receipts during the calendar quarter as compared to the same calendar quarter in 2019. Wages paid during the quarter that suffered the significant decline will qualify for the credit as well as all wages in subsequent quarters until the quarter after the gross receipts are 80% or more of the prior year gross receipts.

Which employees’ wages will qualify for the credit will be dependent upon the number of 2019 full time equivalents (FTE) of the employer?

  1. For employers with less than or equal to 100 FTE, all wages paid during the qualifying periods above will qualify for the credit.
  2. For employers with more than 100 FTE, only wages paid to employees that are NOT PROVIDING SERVICES under the qualifying periods above will qualify for the credit.

Now that a determination is made of the qualifying employers and the qualifying employee wages, how is the credit determined?

Wages include compensation paid and an allocable portion of the health insurance. The credit is 50% of the qualifying wages for the employee, to a maximum of $10,000 of wages for the year. Therefore, the maximum amount of the credit is $5,000 per employee for 2020.

An employer may take the credit on their quarterly Form 941. In anticipation of the credit, the employer may deduct the amount of the credit from their required payroll deposits. In addition, if the credit is in excess of the payroll tax deposit, the employer may file Form 7200 throughout the quarter requesting an advance payment of the excess credit amount.

2020 Changes by TCDTR
As mentioned above, the biggest change brought on by TCDTR was the fact that employers with a PPP loan are now eligible for the ERC. This change is effective retroactively to March 12, 2020. The caveat? The same wages cannot be used for PPP forgiveness and the ERC.

2021 Changes by TCDTR
The ERC was scheduled to expire at December 31, 2020, but TCDTR has extended the ERC until June 30, 2021 along with the following changes which are effective for 2021 only:

  • Increases the credit percentage to 70% (from 50%) of qualifying wages. In addition, the 2021 $10,000 wage limitation is a quarterly limitation, not an annual limitation. Therefore, an employer may be able to receive a credit of up to $7,000 per employee per quarter.
  • Lowers the quarterly gross receipts reduction threshold to more than 20% (from 50%) of the same 2019 quarter. In addition, at the election of the taxpayer, the taxpayer can use the previous quarter to conduct this test. For instance, to determine eligibility for Q1 2021, the taxpayer may use either Q1 2021 as compared to Q1 2019 or alternatively use Q4 2020 to Q4 2019. This will mean that if a taxpayer has a more than 20% reduction in Q1 2021 gross receipts, they will be eligible for the ERC for both Q1 and Q2 of 2021.
  • Increases the number of employers that may be eligible for the credit by increasing the FTE test to 500 from 100. Therefore, qualifying employers with 500 or less employees will be eligible for the ERC on all qualifying wages. Whereas qualifying employers with more than 500 employees will only be eligible for the credit on wages paid to employees that provide no services.
  • Provides for an advance payment of the ERC. Employers with 500 or less employees will be eligible for an advance payment of the ERC equal to 70% of the corresponding 2019 quarterly wages. There will then be a true-up process with the government once the actual credit is determined. Details of the advance payment process have yet to be released.

With the changes to the ERC, particularly the ability to have a PPP loan and still qualify for the ERC and the lower thresholds in 2021, it is expected that more employers will qualify for the ERC. Businesses with PPP loans that have not applied for forgiveness or will be applying for a PPP II loan, will want to maximize the forgiveness of the PPP loan by utilizing non-wages expenditures to the extent allowed while using the remaining wages to maximize the ERC.

 

01/15/2021

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