On December 27, 2020, the Consolidated Appropriations Act of 2021 (CAA) became law. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act), which extends and expands the Employee Retention Credit (ERC) enacted by the CARES Act. Thus, thanks to the CAA, eligible employers may still have CARES Act tax credits available to them in 2021 that otherwise would have expired at the end of 2020, or for which they otherwise would not have been eligible, or for a larger credit than they might have qualified for otherwise.
ERC Under the CARES Act
The CARES Act provided for a refundable payroll tax credit for 50% of qualified wages paid to employees from March 13, 2020 through December 31, 2020. This credit was available to any employer, including non-profits, whose operations are fully or partially suspended due to a pandemic related shutdown order from a government authority, or whose gross receipts for any quarter in 2020 decline by more than 50% when compared to the same quarter in the previous year. Under the CARES Act, the amount of qualified wages was limited to $5,000 per employee for the entire year of 2020 and the credit was applied differently for businesses with more than 100 employees versus those with fewer than 100 employees. Further the CARES Act prohibited any business that received a Paycheck Protection Loan from claiming the ERC.
Extension and Expansion of ERC Under the Economic Aid Act
The CAA extends the ERC through July 1, 2021 and expands several aspects of the credit, including for wages paid during the first two quarters of 2021, as further summarized below. Likely the most significant expansion of the ERC was with respect to businesses that received a PPP loan. Under the CAA, businesses that obtain a PPP loan now may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds. Meaning if a PPP borrower is qualified to receive the ERC they may now claim the ERC for both the 1st two quarters of 20201 and looking back to the time period of March 13, 2020 to December 31, 2020 for wages paid during that time, which were not paid with forgiven PPP proceeds. Additional expansions include:
- The credit percentage increased from 50% to 70% of qualified wages;
- Qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee;
- The threshold for the change in treatment of qualified wages is increased from 100 employees to 500 employees;
- An employer is eligible for the credit for a quarter in which there has been at least a 20% decrease in quarter-over-quarter gross receipts, rather than the 50% decrease as initially required by the CARES Act, and a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility, and
- Rules are provided to allow new employers who were not in business for all or part of 2019 to be able to claim the credit.
ERC Eligible Employer Under the EAA
An “eligible employer” is defined to have experienced one of the following:
- Business was either fully or partially suspended (not operating at “normal capacity”) due to orders (or imposed restrictions) from the federal or a state government, limiting commerce, travel or group meetings due to COVID-19; OR
- Business experienced a decline in gross receipts by at least 20% of what they were for the same calendar quarter in 2019.
Additionally, a government order imposed on a separate company within a business supply chain (an indirect cause), could have resulted in the business not operating at normal capacity and now allow the business to be eligible to claim the ERC through the indirect cause.
ERC Qualified Wages Under the EAA
“Qualified Wages” is different depending on whether a business has 500 employees or more. If a business has more than 500 employees, the ERC is available against employee compensation paid to employees who are not working as a result of one of the two eligibility conditions above (including indirect causes). If a business has 500 or fewer employees, the ERC is available against any employee compensation paid when business operations were affected by one of the two eligibility conditions above (including indirect causes), whether the employee was working or not. Qualified Wages include qualified health plan expenses that are allocable to wages. Similar to the exclusion of wages paid with forgiven PPP loan proceeds, wages used in calculation of the Families First Coronavirus Response Act for sick and family leave credits may not be considered as ERC qualified wages.
Claiming the ERC
If a business qualifies to claim the ERC, the business may claim the ERC on their quarterly Form 941, by reducing required payroll tax deposits on the form. The ERC is first applied against the employer’s share of Social Security taxes due on all wages paid to all employees and then may offset against the rest of payroll tax liabilities for the quarter. If the ERC exceeds all payroll tax liabilities, a business may receive a refund. If a business has already filed its Form 941 and determines it is now an eligible employer, the business may file a Form 941-X.
We recommend working with your accountant or an accounting company specializing in the ERC to determine eligibility and calculate the amount of ERC that can be claimed to maximize benefit. In addition to working with your accountant to maximize credit claimed, we recommend documenting eligibility and seeking a legal memorandum to evidence documented eligibility.