Making Sense of the Employee Retention Credit
The Consolidated Appropriations Act, 2021 (CAA), was signed into law on December 27, 2020, and, with respect to the Employee Retention Credit (ERC), the CAA did two things. First, the CAA retroactively allows businesses that received a Paycheck Protection Program (PPP) loan to also claim the ERC for 2020. Prior to this tax law change businesses were not allowed to claim the ERC if they received a PPP loan. Second, the CAA extended the ERC through June 30, 2021 and made the credit more accessible
So, what does this mean to you? Let’s look at this in two parts. First, the 2020 changes, and second, the 2021 changes. The eligibility for the credit and the calculation of the credit differ from 2020 to 2021.
The 2020 ERC
There are two ways to establish eligibility for the ERC in 2020. First, if your business experienced a significant decline in gross receipts (sales), or second, if your business was fully or partially suspended by a government order in 2020, you may now be able to take advantage of this credit by amending your 2020 payroll tax report on Form 941-X.
A “significant decline” for 2020 is defined as less than 50% of gross receipts as compared to the same calendar quarter in 2019. If your business has an eligible quarter, you would then continue to be eligible for the ERC until after you have a quarter in which your gross receipts return to more than 80% of the same quarter in 2019. If your business has an eligible quarter, and you had less than 100 Full-Time Equivalent (FTE) Employees, all employee wages would be considered eligible wages for the ERC. If your business had more than 100 FTE employees, the eligible wages are limited to those paid to employees to not provide services. In addition to wages, employer provided health insurance costs are eligible for the credit.
The credit for 2020 is 50% of eligible wages plus employer provided health insurance costs, with a maximum of $10,000 per employee wages for the entire year. The maximum credit per employee in 2020 is therefore $5,000.
While the ERC is now available to businesses that received a PPP loan, you cannot use the same wages that were forgiven on a PPP loan for the ERC. Therefore, there needs to be some coordination of the PPP loan forgiveness and the ERC calculation of eligible wages.
Qualifying for the ERC based on a government shutdown is less straight-forward than the significant decline in gross receipts qualification. It is a more facts and circumstances test. The suspension of business is based on “orders from an appropriate governmental authority limiting commerce, travel, or group meeting due to COVID-19”. If your business qualifies for the ERC based on a 2020 government shutdown, the eligible wages are limited to the time in which the business was deemed to be fully or partially suspended.
The 2021 ERC
The eligibility requirements for 2021ERC have been relaxed significantly and the credit has also been increased. This is great news for many businesses.
A “significant decline” for 2021 is defined as less than 80% of gross receipts as compared to the same calendar quarter in 2019. To qualify, a business may use either the fourth quarter 2020 gross receipts compared to fourth quarter 2019, or first quarter 2021 gross receipts compared to first quarter 2019. This is very important to note as businesses can calculate eligibility for first quarter 2021 right now based on fourth quarter 2020 gross receipts.
Another significant change is that the number of FTE employees was increased from 100 to 500 making many more businesses eligible for the ERC.
The credit for 2021 is 70% of eligible wages with a maximum of $10,000 per employee wages per quarter. The maximum credit per employee in 2021 is therefore $7,000 per quarter or $14,000 for quarters one and two combined.
Boeckermann Grafstrom & Mayer (BGM) has assembled a team of professionals that has invested time in understanding the credit, how to maximize it, and how to apply for it to get immediate cash flow relief via reduced payroll tax payments. Please contact us for assistance by completing the Contact Us form on the website and reference “Employee Retention Credit” in your message. You can also read additional information about the ERC by visiting the COVID-19 Updates page on the website.