On Dec. 27, 2020, the Consolidated Appropriations Act (CAA) was signed into law, comprising several bills that provide continued economic relief from the COVID-19 pandemic. Chief among this relief is an extended and expanded employee retention credit (ERC), featuring sweeping changes impacting its availability both retroactively and prospectively.
Due to the prospective nature of certain notable changes to the now extended ERC, the CAA, in effect, creates an entirely new credit for 2021 that is separate and distinct from the ERC available for 2020, and appears to offer a significant opportunity for many employers. Employers are strongly encouraged to work with their tax advisors to explore eligibility in both 2020 and 2021, to ascertain if one or more opportunities are presented.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act incentivized employee retention by offering a payroll tax credit based on employee wages paid or incurred from March 13, 2020, through Dec. 31, 2020. However, the CARES Act prohibited Paycheck Protection Program (PPP) loan recipients from also taking an ERC. Given the immense popularity of the PPP, this limitation excluded numerous employers from eligibility for the credit. The CAA changes this by striking this prohibition from the CARES Act and allowing employers to potentially benefit from both the PPP and the ERC. The CAA also codifies certain guidance previously provided by the Internal Revenue Service pertaining to gross receipts for tax-exempt entities and treatment of certain allocable healthcare expenses such as qualified wages.
For those employers that already received a PPP loan in 2020 and are looking to take advantage of the ERC in 2020, it’s important to understand both how the credit works and that the rules remain unchanged for 2020. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order (Suspension Test) or (2) a significant decline (i.e., greater than 50%) in gross receipts due to COVID-19 (Gross Receipts Test).
For the 2020 credit, the amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are limited to $10,000 per employee for the entire year — allowing up to $5,000 in credit per employee. Wages that can be treated as “qualified” hinge on whether an employer is a large or small employer. Specifically, large employers may only count as qualified wages those wages paid for services not rendered, whereas small employers can count all wages paid as qualified. For 2020, a large employer is one with more than 100 average full-time equivalent employees based on calendar year 2019. Additional resources and guidance pertaining to these rules can be found on bakertilly.com.
Employers should be aware of two items of note pertaining to the coordination between PPP loans and the ERC:
As discussed above, the ERC available to employers in 2021 should be treated as a different credit from its 2020 counterpart, a distinction drawn as a result of the sweeping changes that the CAA made to the ERC for the first and second quarters of 2021 only. These changes, paired with the lifting of the prohibition on PPP recipients, presents an opportunity for employers meeting certain eligibility criteria to obtain refundable payroll tax credits of potentially significant dollar value.
The following is a non-exhaustive list summarizing key changes to the ERC that are prospective only, and therefore apply only to the period of Jan. 1, 2021, through June 30, 2021:
Based on these changes to the credit for 2021, a remarkable opportunity is presented to employers that can show they:
We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.