More Companies May Now Qualify for the Employee Retention Credit
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a continued effort to support the economy during the COVID-19 pandemic. One significant adjustment over the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is an expansion to the Employee Retention Credit (ERC).
Prior to the CAA, a business was not allowed to receive the Paycheck Protection Program (PPP) loan and the ERC. Most of our clients were able to qualify for, and received, the PPP loan, so we did not discuss the ERC much. However, the CAA law retroactively altered this provision and now allows for both the PPP loan and the ERC, which means that the credit can be retroactively claimed. While this is true in concept, the IRS hasn’t released the specific rules for coordinating the payroll expenses claimed for PPP forgiveness and the ERC. In addition, they haven’t indicated the exact procedure for making a retroactive ERC claim. Additional guidance is needed and expected.
The CAA also made other important increases to the ERC to allow more businesses to qualify for the credit in 2021. These credits can essentially be viewed as two distinct credits, one for 2020 (CARES) and one for 2021 (CAA).
The CARES Act ERC
This is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order (Suspension Test) or (2) a significant decline (i.e., greater than 50%) in gross receipts due to COVID-19 (Gross Receipts Test). The “Suspension Test” will allow many businesses to qualify, but will also necessitate a facts and circumstances evaluation. The IRS has issued preliminary rules to define the Suspension Test, which can be found HERE. We expect additional guidance and interpretations of these rules will develop in the coming weeks and months.
- The credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020
- Qualified wages are limited to $10,000 per employee for the entire year — allowing up to $5,000 in credit per employee
- Wages that can be treated as “qualified” hinge on whether an employer is a large (greater than 100 employees) or small employer (100 or less employees)
- If used with the PPP loan, the credit can’t be used with the same wages (ie. no double dipping)
The rules for using wages in PPP forgiveness and ERC, as well as the process for retroactively applying for the ERC, have not been released by the SBA or IRS yet. We are encouraging our clients to begin reviewing the Suspension Test rules referenced above and determine if they may be eligible for ERC (partial or complete shutdown of operations during 2020). Then, we will be waiting for further guidance and rules by the IRS and SBA.
The CAA ERC
This version of the credit will be available only for the first and second quarter of 2021. The eligibility criteria has been expanded and the gross receipts test has been relaxed in order to increase the eligibility for the credit.
- Full time employee threshold for 2019 increased from 100 to 500 for a small employer. This allows businesses up to 500 employees to categorize all wages as qualified.
- The amount of qualified wages per employee increased to $10,000 per calendar quarter in 2021 from $10,000 per calendar year. This effectively increases the qualified wages per employee to $20,000 for 2021, doubling the prior limit.
- The credit also increased from 50% to 70% of qualifying wages. This results in a maximum credit per employee of $14,000 ($10,000 of qualified wages per quarter with a 70% credit on those wages equaling $7,000 per quarter for a grand total credit of $14,000 per employee).
- The gross receipts test relaxed from requiring a 50% reduction to only needing a greater than 20% decline in gross receipts as compared to the same quarter in 2019.
- For example, a business would qualify for the credit if Q1 2019, gross receipts were $100,000 and Q1 2021 gross receipts were $79,000. The business may also compare Q4 2019 to Q4 2020.
- Employers may still rely on the Suspension Test for eligibility.
Given that the IRS and the SBA have yet to release formal guidance, we have some time to allow those details to be released before we need to act. For now, the best course of action is to begin considering whether you may qualify for the ERC, either retroactively in 2020 or proactively in 2021. Please contact your BiggsKofford team member if you believe you are eligible. We are continually monitoring the release of information from the SBA and IRS and we will provide more guidance as it is released. If you have additional questions or need to speak about your specific situation, contact our team!