In March 2020, the CARES Act created the Employee Retention Credit (“ERC”), which allowed qualifying employers of any size to claim a refundable payroll credit for up to 50% of qualifying wages, with a maximum of $10,000 per employee ($5,000 of credit).
Congress has now passed The Consolidated Appropriations Act (“the Act ”) , signed by President Trump on December 27, 2020 which provides nearly $900 billion in additional aid to families, businesses, and individuals. The Act significantly expands the ERC’s eligibility in 2020 and the actual 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 credit. Under the Consolidated Appropriations Act, those employers can retroactively apply for the ERC credit, 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.
The Act includes new, expansive provisions for advance payments of the ERC to small employers (less than 500 employees). The Treasury and the SBA are expected to issue guidance explaining that payroll costs paid during the PPP covered period can be treated as qualified wages, as long as those wages were not paid from the proceeds of a forgiven PPP loan. The Act also allows employers to take the ERC for bonuses paid to essential workers.
The CARES Act required employers to pick either a PPP loan or the ERC and did not allow them to take advantage of both programs. An encouraging piece of the new legislation is Section 206(c) which provides that employers that received PPP loans can now qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. In theory, an employer who received a PPP loan should consider reviewing their forgivable expenses to allow for a larger pool of “qualified wages” to possibly be utilized for the ERC if the employer qualifies. Section 206(c) applies retroactively, as if it were included in the CARES Act.
Due to the obvious allure of a forgivable loan with the PPP, many businesses disregarded the ERC because they could derive more benefit from the PPP. Now, with the ERC back in play even for PPP borrowers, it is necessary for every borrower to quickly determine if they are eligible for the ERC, and if so, to determine the interplay with PPP loan forgiveness.
We will continue to provide more information on the ERC and its interaction with PPP forgiveness as it becomes available.
For additional information or assistance with the Employer Retention Credit, 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.