The Expansion and Clarification of the Employee Retention Credit

The CARES Act created the Employee Retention Credit (ERC) as part of the government’s relief package to mitigate the economic impact of COVID-19. On Dec. 28, 2020, Congress enacted the Consolidated Appropriations Act (CAA), which clarified and expanded the scope of the ERC.

Overall, the ERC is expanded in terms of amount and employer size and includes a more flexible gross receipts test. Further, PPP loan recipients are now also eligible for the credit if they meet certain criteria. We’ve summarized the changes in key provisions of the credit and the new guidance. Noteworthy updates include broader application of the credit and news that changes are retroactive.

Time of Availability

Previously, the credit only applied to qualified wages paid between March 12, 2020, through Dec. 31, 2020. The new legislation extends the credit period for six more months through June 30, 2021.

Eligibility Requirements

There are two main triggers for eligibility. The first applies in all instances, with the credit available to any business whose operations were partially or totally suspended by a governmental COVID-19 order during the time the order is in effect.

The second option to become eligible has been revised under the new act. Previously if a business had seen a decline in their gross receipts of more than 50% in any quarter of 2020 (as compared to the same quarter in 2019), they were eligible. This eligibility held until the gross receipts recovered to a decline of less than 20%.

Under the revision (applicable Jan. 1, 2021 forward) a decline in gross receipts of more than 20% (as compared to the same quarter in 2019) will cause the entity to be eligible. For example, if your Q1 2021 gross receipts are $79,000 and your Q1 2019 gross receipts were $100,000, that 21% decline makes you eligible for the credit in Q1 2021. Under the old rules, you wouldn’t be eligible because the decline was not greater than 50%. (Note: If your business didn’t begin operations until 2020, you can use a comparison to 2020 instead of 2019.)

Percentage of Wages and Maximum Credit

The percentage of wages qualified for the credit increased from 50% to 70%. The cost of providing healthcare benefits to employees remains deductible as before. This change is applicable with the first quarter of 2021.

Coupled with this is an increase in the maximum credit amount. Previously, the annual maximum credit per employee was $5,000. Starting Jan. 1, 2021, this increases to $7,000 for both the first and second quarters, for a $14,000 annual maximum.

Employer Size for Whether an Employee is Working

The employer size threshold is another notable change. The original act prevented companies with more than 100 employees from taking the ERC for any employee still performing services (even if the company is at reduced capacity). Starting in 2021, this increases to 500 employees.

Paycheck Protection Program Loans Versus ERC

Previously, companies who participated in the PPP loan program were not eligible for the ERC, including affiliated companies. The updated law retroactively changes this requirement. Companies that received PPP loans are now eligible for the ERC as well, but there are restrictions.

The change applies to wages paid on or after March 13, 2020. Prior PPP loan recipients cannot claim the credit for wages paid with proceeds from a PPP loan that has received forgiveness. If the company paid qualified wages over the amount of the forgiven quantity, they can claim the credit retroactively. The IRS is expected to issue more guidance on this topic.

Advance Payments

The original legislation had no advance payment option; employers were required to pay employee wages before they could receive the credit. While this is still not settled, the IRS is expected to draft guidance allowing for advance payment of the ERC for companies with 500 or fewer employees based on 70% of the average quarterly payroll for the comparable quarter in 2019.

Eligibility of Governmental Entities

Previously, the ERC was not available to governmental agencies at any level. However, starting Jan. 1, 2021, public colleges and universities, agencies that provide medical care, and select other agencies such as federal credit unions are eligible.

The CAA extended and clarified many ERC provisions through June 30, 2021. Most likely, employers will need to file amended payroll tax returns for the second and third quarters, but guidance is still pending for this as well as for PPP loan recipients who want to access the credit.

These changes can be complex and compliance can be cumbersome. If any of the information outlined above applies to you, reach out to us so we can help you capture the most value from the changes to ERC rules.

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