If you are an employer that had a significant decline in gross receipts over the last 12 months or faced full or partial mandatory closure by government order, then the Consolidated Appropriations Act recently signed into law and in particular, revisions to the Employee Retention Credit, is important for you for the following reasons:
- 1. You may be eligible for a retroactive Employee Retention Credit for 2020 even if you received PPP Funding
- 2. You may eligible for additional Employee Retention Credit in 2021 for up to $14,000 per employee
The most significant impact this will have on you and your business is the potential for additional cash flow for your business to continue to weather the uncertain economic conditions.
When the CARES Act was signed into law back in March 2020, it was clear that taxpayers who received PPP (Paycheck Protection Program) loans were not eligible for the Employee Retention Credit (ERC) and because of that, any business that received PPP likely dismissed it. However, the most recent COVID Bill – The Consolidated Appropriations Act of 2021, has made some retroactive changes to the ERC for 2020 as well as significant changes to the credit for the first two quarters of 2021.
Important Changes to the Employee Retention Credit for 2021
As it relates to the newly constituted credit for the 2020 tax year, the most significant change is in Section 206 of the Bill that allows employers to retroactively borrow a PPP loan and claim the ERC for 2020. However, an employer is not allowed to double dip and include the same payroll costs for PPP forgiveness and the ERC. Under the new law, it orders the preference of payroll costs first to the ERC and then second to PPP unless the taxpayer elects otherwise.
So, how does one potentially achieve PPP forgiveness and ERC? Here’s an example:
Let’s say a business received a $200,000 PPP Loan. Over the course of the 24-week covered period, they paid $320,000 of eligible payroll costs and $60,000 of other non-payroll costs eligible for forgiveness under the PPP. Presumably, the employer could include $140,000 of payroll costs and $60,000 of other costs to achieve PPP forgiveness which leaves $180,000 of payroll costs that COULD qualify for the ERC assuming the employer’s eligible to claim the credit.
For employers that have already applied for PPP forgiveness, the ship may have already sailed to retroactively claim ERC for 2020. In many cases, an employer would have elected a 24-week covered period for PPP forgiveness and likely included all 24 weeks of payroll costs in their PPP application. Although covered expenses may have far exceeded the PPP loan amount, nonetheless those payroll costs were included in your PPP forgiveness application. Further guidance is needed to clarify if there are steps that can be taken for employers that previously submitted PPP forgiveness to retroactively amend their PPP forgiveness application to gain eligibility for the ERC.
For employers that have not yet applied for PPP forgiveness, after determining eligibility for the ERC (with a trusted advisor, of course!), a strategy for optimizing payroll costs to maximize PPP forgiveness while also claiming the ERC would need to be executed.
The Freed Maxick Tax Team’s guidance is that if you believe you would retroactively be eligible for the ERC in 2020, it might be best to sit tight and discuss your situation with us before submitting a PPP loan forgiveness application as there may be additional instructions from the SBA and Treasury.
Here’s what we know so far about the key changes to the ERC on a prospective matter. These changes only apply for credits earned between January 1, 2021 – June 30, 2021:
- The COVID Bill extends the ERC program from an original end date of December 31, 2020 to a new end date of June 30, 2021 and alters the components of the ERC for the credit period of January 1, 2021 – June 30, 2021 and ONLY for that period.
- Businesses are still not allowed to double dip qualified expenses for PPP and ERC. If you receive PPP2 funding, just tread lightly thinking it’s a slam dunk for both PPP and ERC as those same limitations still apply.
- The ERC is now calculated using 70% of qualified wages.
- The $10,000 limit per employee on qualified wages is still in place but now applicable for any qualified quarter. Employers could now be eligible to claim ERC on $10,000 of qualified wages on the same employee for wages paid in Q1 and Q2 of 2021. What was once a maximum credit of $5,000 per employee could be worth up to $14,000 in 2021.
- Eligibility for the ERC based on a gross receipts is now met if gross receipts decline 20% or more in Q1 or Q2 of 2021 compared to the same calendar quarter of 2019. Businesses also have the option of applying the 20% gross receipts test to an immediately preceding calendar quarter compared to the same quarter of the previous year. This means to be eligible for Q1 of 2021, you can either compare Q1 2021 gross receipts to Q1 gross receipts of 2019 OR you can compare Q4 2020 gross receipts to Q4 gross receipts of 2019.
- If an employer has fewer than 500 employees, qualifying wages for ERC eligibility purposes can now be included, regardless of whether employees are providing services or not.
Next Steps for an Employer to Claim the Employee Retention Credit
What was once a credit that most dismissed because they received PPP loans is now a credit that all businesses should take seriously. Determinations of eligibility and the subsequent documentation and reporting necessary for claiming the ERC is still murky and will likely be burdensome.
We urge you to consult with your tax advisor to explore whether or not you can benefit from these revisions to the CARES Act. The Freed Maxick Tax Team is prepared to help you navigate though these tricky waters and we are available for a complimentary consultation to this end.
Use the form below to connect with us or email Jonathan at email@example.com to begin this exploration.