After a series of rule changes and expansions to various COVID-19 relief programs, many companies are reconsidering certain federal benefits they had previously ruled out. The employee retention credit (ERC) is a prime example.
The initial intent of the ERC was to make it easier for a business to keep employees on the payroll if it was forced to close or partially suspend operations due to a mandatory government shutdown order or if it experienced significant revenue loss during the pandemic. While the basic structure and purpose of the program remain unchanged, both the eligibility criteria and the size of the potential benefits have changed significantly.
Given these changes, companies that were previously ineligible or uninterested in the ERC should take another look.
When the ERC was first enacted in March 2020, businesses that received a loan under the Paycheck Protection Program (PPP) were prohibited from claiming the credit. Because of this restriction, many companies chose to apply for larger, forgivable PPP loans rather than claim the ERC.
But in December 2020, the Consolidated Appropriations Act of 2021 (CAA) removed the PPP restriction. Companies that received PPP loans are now eligible to claim the ERC retroactively to March 2020, although they cannot use the same wages to qualify for both programs. The CAA also extended the ERC’s expiration date to June 30, 2021 and made it easier for companies to qualify for the credit.
For example, at the program’s outset, companies that were not subject to a government shutdown order could claim the credit only if their 2020 quarterly gross receipts declined by more than 50 percent when compared to the same quarter in 2019. Now companies may qualify if their 2021 quarterly gross receipts declined by only 20 percent from the corresponding quarter in 2019.
The potential size of the credit has also increased significantly. Originally, eligible companies could claim a credit equal to 50 percent of the qualified wages they paid to employees between March 13, 2020 and December 31, 2020. The maximum qualified wages were capped at $10,000 per employee, which resulted in a maximum credit of $5,000 per employee for all of 2020.
For qualifying companies in 2021, the CAA increased the maximum qualified wages from $10,000 per employee per year to $10,000 per employee per quarter. It also increased the credit amount from 50 percent of qualified wages to 70 percent. Then, on March 11, 2021, the American Rescue Plan Act (ARPA) extended the program through the rest of 2021.
As a result of these combined changes, the maximum potential credit could now amount to as much as $7,000 per eligible employee for each quarter of 2021—for a possible maximum of $28,000 per eligible employee per year. The ARPA also added a new recovery startup business provision effective for the third and fourth quarters of 2021. Some businesses that had begun operations after February 15, 2020 and meet various other criteria could be eligible for as much as a $50,000 credit per quarter.
For many businesses, the number of qualified employees has also increased. Originally, companies with 100 or fewer full-time employees could count all employees’ wages to qualify for the ERC, but companies with more than 100 full-time employees could claim the credit only for those employees who were not providing services but were still being paid. The CAA increased that threshold to 500 employees, making larger credits available to many more businesses.
Unlike a PPP loan, there is no separate application or approval process involved in claiming the ERC. A qualifying employer simply claims the credit on its quarterly employment tax return, which the IRS modified last year to accommodate it. If the credit amount exceeds the payroll taxes due, the excess will be refunded to the company. However, credits for 2020 must be claimed on an amended payroll return and it is taking the IRS longer than usual to process these returns.
There are limitations and additional qualification criteria, of course, but with increased benefits and broader eligibility, companies that had previously ruled out the ERC could now find it merits a second look. Because it is both refundable and advanceable, the ERC can be a valuable source of additional funds to help with cash flow needs.
Please contact us to learn more about the Employee Retention Credit or any other pandemic-related tax credits.