Do You Now Qualify for Employee Retention Credits?

The employee retention credit (ERC) created by the CARES Act has provided much-needed cash flow to businesses during 2020 but was limited in its availability as originally written.

The Consolidated Appropriations Act, 2021 (CAA) was finally signed into law, and among its more impactful changes, clarifies and expands the ERC. These changes will become a significant source of cash flow for many more businesses in 2021. The bill modifies several areas of the ERC that could impact businesses’ 2020 Form 941’s. The bill also modifies and expands this credit going into 2021.

Below is a comparison of key provisions of the ERC from the CARES Act and the CAA.

 

CARES Act

Consolidated Appropriations Act, 2021

Period of Credit Availability

Qualified wages paid after March 12, 2020, and before January 1, 2021.

Qualified wages paid after March 12, 2020, and before July 1, 2021

Eligibility Requirements

Business operations that are either fully or partially suspended by a COVID-19 lockdown order; or, for any quarter in 2020, if gross receipts are less than 50% of gross receipts for the same quarter in 2019.

Effective Jan. 1, 2021, business operations that are either fully or partially suspended by a COVID-19 lockdown order; or for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019.

Amount of Credit

50% of the qualified wages paid to an employee, plus cost of health benefits

Beginning January 1, 2021, 70% of qualified wages, plus cost of health benefits

Maximum Credit Amount

Annual cap of $5,000 per employee.

Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of 2021, max $14,000 credit per employee.

Company Sizes Eligible

100 or fewer full-time employees (FTEs).

500 or fewer FTEs.

Employees of all affiliated companies sharing more the 50% common ownership are aggregated for this 500-employee threshold.

PPP Loan Eligibility

A company that received a PPP loan was not eligible for the employee retention credit. This extended to all affiliated companies that shared common ownership, so that if one company received a PPP loan, any other company with more than 50% common ownership was ineligible to claim the credit.

A company that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit.

This change is retroactive to the effective date under the original law for wages paid after March 12, 2020.

The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.

A company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively.

Companies related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively, if they are otherwise eligible for the credit.

Limitation on Pay Rate Increases

No credit for pay rate increases.

Credit is allowed for hazardous duty pay increases, among others.

Disallowance for Governmental Entities

The ERC was not available to any federal, state, or local governmental entity.

Effective January 1, 2021, state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress are eligible for the credit.

If you believe you may qualify for employee retention credits, contact us to discuss how to claim these credits.

For all the latest resources and insights to help your business navigate the changes caused by the coronavirus pandemic, check out our COVID-19 Resource Hub.