Along with other changes, the recent $2.3 trillion Consolidated Appropriations Act (Act) made significant changes to the Employee Retention Credit (ERC) created earlier in 2020 by the CARES Act. These changes could generate significant opportunities for eligible taxpayers, both retroactively and prospectively.
repeals the prohibition against Paycheck Protection Program loan recipients claiming the ERC
allows such taxpayers to go back and claim the ERC for 2020
extends and expands the ERC for 2021
The CARES Act created a refundable payroll tax credit for eligible payroll costs of certain employers negatively impacted by COVID-19. Unlike the PPP, the ERC was not limited by the number of employees, but was only available to taxpayers who either 1) had their business fully or partially suspended during at least one quarter in 2020, or 2) had a precipitous drop in gross receipts for quarters in 2020 relative to the same quarters in 2019. Once a business experienced such a quarter, it could claim a credit of 50% of qualifying wages up to $5,000 per employee for that quarter (up to $10,000 per employee for all of 2020). Under the CARES Act, if a business participated in the PPP, it was not allowed to claim the ERC credit. PPP participants therefore paid little attention to the ERC during 2020.
The Act strikes the language from the CARES Act providing that PPP recipients are ineligible for the ERC. The main caveat is that taxpayers cannot claim the ERC on forgivable expenses under the PPP (i.e., no “double dipping”). Due to differences between the programs’ definitions of eligible costs, as well as the fact that many businesses had eligible expenses in excess of their PPP loan amounts, a significant ERC refund opportunity may be available based on 2020 payroll costs.
Even if a taxpayer cannot utilize the ERC in 2020, the Act extends the ERC to wages paid through June 30, 2021, and expands the ability of employers to claim the credit for 2021 wages. The previous caps of 50% of qualifying wages up to $5,000 credit per quarter ($10,000 total credit in 2020) have been upgraded to 70% of qualifying wages up to $7,000 credit per quarter ($14,000 total in 2021). Further, an employer can qualify for the credit in a 2021 calendar quarter if (a) their gross receipts for the calendar quarter are less than 80% of their gross receipts for the same calendar quarter in 2019 (up from the 50% decline required for 2020) or (2) their gross receipts for the immediately preceding calendar quarter are less than 80% of the gross receipts for the corresponding calendar quarter in 2019.
Since PPP participants were not previously eligible for the ERC, and the Act has made further changes to what are eligible costs, additional analysis will likely be needed to quantify how valuable the ERC could be for 2020 and/or 2021. Please reach out to us today to perform a “credit study” of your available documentation and relevant facts and circumstances to maximize your benefits from both programs in 2020 and 2021. Time is of the essence, as the deadline to claim 2020 ERCs on your fourth quarter payroll tax report is January 31, 2021, as the ERC could offset some or all of your fourth quarter payroll tax liability.
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