President Trump signed The Consolidated Appropriations Act (“the Act”) on December 27, 2020, which provides nearly $900 billion in additional aid to families, businesses and individuals. The Act significantly expands the Employee Retention Credit (“ERC”) eligibility in 2020 and the credit dollars available for employers for the first two quarters of 2021.
The most significant ERC changes at a glance:
In 2020, under the CARES Act, employers receiving a PPP Loan had been ineligible for the ERC. Under the Consolidated Appropriations Act, those employers can retroactively apply for the ERC, if they meet the new eligibility requirements.
For Q1 and Q2 of 2021, the credit rate increased from 50% to 70% of qualified wages, and the limit on per-employee wages is now $10,000 per quarter, rather than per year. In other words, employers can receive a maximum of $14,000 per employee for the first two quarters of 2021.
For Q1 and Q2 of 2021, employers can now be automatically eligible for the ERC if gross receipts are less than 20% from the corresponding quarter in 2019 (for example, Q1 2021 gross receipts compared to Q1 2019 gross receipts). There is additional flexibility in quarter comparison, but a specific election is required.
Employers impacted by a government order (full or partial shutdown) are eligible even if they do not meet the gross receipts test.
For Q1 and Q2 2021, the threshold number of employees increased from 100 to 500 when determining how “qualified wages” are to be calculated. As such, employers with less than 500 employees can include all wages paid and health benefit expenses (up to the thresholds mentioned above) regardless of whether those employees were providing services.
For employers with more than 500 employees, “qualified wages” include only those wages and healthcare benefits paid to employees to NOT provide services.
The Act also provides that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
Even with the more lenient rules, most energy companies likely won’t be eligible for the ERC during 2020. However, the changes in 2021 make the credit more attainable. Increasing the number of employees from 100 to 500 and reducing the decrease in gross receipts (compared to the same quarter in 2019) from 50% to 20% opens the credit to more companies.
Looking at key metrics that drive gross receipts, we take a deeper dive into natural gas pricing, rig counts in the Marcellus Basin and well permits in Pennsylvania, comparing current activity to Q1’19:
Pricing - The 12-month average Dominion South Point pricing has decreased from an average of $2.65/MMBTU during Q1’19 to $1.402/MMBTU for Q4’20, representing about a 47% decrease. Prices would have to increase over $2.12/MMBTU to near the 20% decrease mark.
Rig Counts - According to the Baker Hughes rig count report, rig counts in the Marcellus Basin have decreased from an average of 63 rigs during Q1’19 to 30 during the first two weeks of 2021, representing over a 50% decrease in rig counts.
Well Permitting - According to the Pennsylvania Department of Environmental Protection website, there were 1,478 unconventional wells permitted during 2019 compared to 920 in 2020.
If you believe your company will meet the criteria outlined above and could be eligible for the ERC, reach out to any of your contacts at Schneider Downs or contact Matthew Werner at [email protected] or Ross Alessandro at [email protected].
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.