The Employee Retention Tax Credit (ERTC) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but limitations on its availability tempered interest in the relief measure. That is about to change, thanks to significant changes made on Dec. 27, 2020, by the Consolidated Appropriations Act, 2021 (the Act). The ERTC is now available to employers that received loans under the Payroll Protection Program (PPP), so any employer meeting ERTC eligibility criteria can benefit. Because employers potentially benefit from the enhanced ERTC on a retroactive basis, employers should immediately begin analyses to identify and calculate the value of retroactive or prospective ERTC benefits.
The ERTC is a fully refundable tax credit for employers equal to a percentage of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. The ERTC is commonplace in disaster relief legislation (such as the CARES Act) and is designed to encourage employers to retain their workforce during periods of disruption. Under the CARES Act, the ERTC is equal to 50% of qualified wages paid after March 12, 2020, and before Jan. 1, 2021. The CARES Act provides that the maximum amount of qualified wages taken into account with respect to each employee for all 2020 calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee during 2020 is $5,000.
Very generally, eligible employers for the purposes of the ERTC are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experience a 50% decline in gross receipts during the calendar quarter.
As originally provided by the CARES Act, employers who received a PPP loan were ineligible to claim the ERTC.
The Act makes several important modifications to the ERTC that both expand and extend its application. The prospective modifications extend the ERTC through the first two quarters of 2021. Beginning on Jan. 1, 2021 and through June 30, 2021, the Act:
- Increases the credit rate from 50 to 70% of qualified wages;
- Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
- Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
- Allows certain public instrumentalities to claim the credit;
- Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
- Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; and
- Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
The maximum additional amount of per-employee qualified wages is $20,000 during the first two quarters of 2021, which would produce an additional per-employee ERTC of $14,000 during 2021. This is only the beginning of the additional benefits, since there are potential retroactive benefits to also consider.
The Act removes a limitation under the CARES Act that prohibited employers from claiming the ERTC when the employer also received a PPP loan. The removal of this prohibition is made retroactive to the date of enactment under the CARES Act, meaning employers may already have potential ERTC benefits that did not exist previously. The Act imposes guardrails to limit the extent of this retroactive benefit, however. Specifically, the Act provides that an employer may not claim the ERTC on the same wages that are used to substantiate PPP loan forgiveness. An employer chooses to apply wages toward PPP loan forgiveness by making an election to not claim the ERTC (the IRS will eventually establish these election procedures).
Still, the retroactive benefits made by the Act to the ERTC should not be overlooked. An employer may not qualify for PPP loan forgiveness, in which case all of the wages are potentially available for the ERTC. Further, an employer may have incurred more wages than were needed to substantiate PPP loan forgiveness, in which case these “excess” 2020 wages are now available for the ERTC.
The Act provides special rules that employers may use to claim retroactive ERTC benefits. In recognition of the fact that payroll tax returns have already been filed for the first three quarters of 2020, the Act permits an employer an election to treat the retroactive ERTC benefits as incurred during the fourth quarter of 2020. For this purpose, the retroactive benefits are those based on eligible wages paid after Dec. 31, 2019, and before Oct. 1, 2020. Again, the IRS will eventually establish these election procedures, but this election should prevent the need to amend previous payroll tax returns in order to claim the retroactive ERTC benefits.
The retroactive and prospective changes to the ERTC dramatically increase its relevance to businesses affected by the coronavirus pandemic. To assist you with calculations for the amount of the ERTC we developed an ERTC calculation template, which may be downloaded here.
The IRS also has a webpage dedicated to the operation of the ERTC, including information that is essential to the determination of an eligible employer. As of the date of this writing, the IRS webpage is not yet updated for the changes made by the Act but it should be updated soon and still has current information about eligible employers that is unaffected by the Act.
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Craig Klein is a Tax Managing Director in the Not-For-Profit & Education Practice in New England. He can be reached at firstname.lastname@example.org or 617.761.0509.
Brenda Booth is a Tax Managing Director in the Not-For-Profit & Education Practice in New England. She can be reached at email@example.com or 617.761.0729.
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