In a previous message detailing the Consolidated Appropriations Act, 2021, we touched on changes to the Employee Retention Credit (ERC). We've been receiving quite a few questions on this topic, so we decided to revisit the ERC and offer some tax planning insight around this robust tax credit. Here's what you need to know - a number of the ERC's limitations were expanded or retroactively changed - making the ERC more broadly applicable for many business owners.
Originally introduced under the CARES Act, the ERC is a refundable tax credit equal to 50% of up to $10,000 in qualified wages (i.e., a total of $5,000 per employee) paid by an eligible employer whose operations were suspended due to a COVID-19-related governmental order or whose gross receipts for any 2020 calendar quarter were less than 50% of its gross receipts for the same quarter in 2019.
The Consolidated Appropriations Act, 2021 made several retroactive changes to the credit including:
Employers who received PPP loans MAY STILL QUALIFY FOR THE ERC with respect to wages that are NOT paid with PPP loan forgiveness proceeds.
Group health care expenses can be considered “qualified wages” even when no other wages are paid to the employee.
The following changes to the ERC will apply from January 1 to June 30, 2021:
The credit is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, a safe harbor is provided allowing employers to use prior quarter gross receipts to determine eligibility and the ERC is available to employers that were not in existence during any quarter in 2019. The 100-employee threshold for determining “qualified wages” based on all wages is increased to 500 or fewer employees.
The credit is available to certain government instrumentalities.
The bill clarifies the determination of gross receipts for certain tax-exempt organizations and that group health plan expenses can be considered qualified wages even when no wages are paid to the employee.
New, expansive provisions regarding advance payments of the ERC to small employers are included, such as special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan. Further, the bill strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
When applying for PPP loan forgiveness, you'll want to think strategically about your forgiveness allocation and consider the ERC tax credit. Before the expanded ERC, many PPP borrowers had planned on applying for PPP loan forgiveness using only payroll expenses.
Revising your strategy to apply with 60% payroll expenses and 40% covered operating expenses would free up additional payroll for the ERC.
If you have questions or need more information, please email us at info@falcpa.com or contact your Client Service Director.
Below you will find a link to the IRS FAQ about the credit. It's an expansive document because the IRS is trying to address the variety of complexities for differing circumstances. The FAQ is, however, easy to navigate and locate specific information.
To speak to a qualified CPA about PPP loan forgiveness, contact FAL at 702-870-7999 today.