As part of the Consolidated Appropriations Act of 2021 (CAA) signed by President Donald
Trump, vital revisions were made to the Employee Retention Tax Credit (ERTC) making it more available to many small business owners this year. Originally, not many employers availed the credit after the CARES act was passed in March 2020, because it was off the table once they borrowed PPP loans.
The ERC, unlike PPP, was not limited by the number of employees. It is a refundable payroll tax credit against certain employment taxes equal to 50% of the qualified wages an eligible
employer pays to employees after March 12, 2020.
Based on the original requirements, businesses that could claim the ERC were:
- Businesses that got partially or fully suspended during at least one quarter in 2020
- Businesses that had at least 50% drop in gross receipts for quarters in 2020 compared to the same quarters in 2019. (If they qualify, they could continue taking the credit until their gross receipts returned to at least 80% of what they were for the same quarter in 2019)
When a business experienced at least 1 quarter of either situation, they could claim a refundable payroll tax credit of up to $5,000 per employee for wages paid between March 12 and December 31, 2020 capped at $10,000 per employee.
The definition of “qualified wages” was different for businesses that have less or more than 100 full-time equivalent employees (FTEs) during 2019.
- For employers with less than 100 FTEs, ALL wages paid to an employee during an eligible quarter can be a part of the credit, regardless if the employee is currently working.
- For employers with more than 100 employees, only wages given to an employee during an eligible quarter to not provide services are covered to claim a credit.
The CAA made substantial changes to the ERTC rules. Most important changes are outlined in Section 206 and 207 of the Act and will be discussed below:
Section 206
- This section mainly expands the eligibility rules for the ERTC to include those who also availed a PPP loan for 2020. This overturned the original provision that barred
borrowers to avail both programs. The catch, however, is that lawmakers do not allow you to have the same dollars of payroll cost as a safeguard against double dipping. This means any payroll costs (W-2 wages or health care costs) for which a taxpayer claims an ETRC are not eligible to be forgiven in PPP, and the priority goes to the ERTC.
- Second, taxpayers are now allowed to elect to not include certain wages and allocable health care costs in the computation of the ERC credit.
- Third, The SBA are required to issue guidance in the case if a borrower elects under
Section 2301(g)(1) to count wages for PPP forgiveness rather than the ERC credit, if it out that PPP payroll costs are not forgiven, the payroll costs can still be regarded as ‘’qualified wages’’ for purposes of the ERTC.
Section 207
- This section effectively extends the ERTC program from December 31, 2020 to June 30, 2021.
- Computational changes are made effective on January 1, 2021 until June 30, 2021 and not retroactive to 2020.
- Credit percentage will be increased from 50% to 70%.
- The maximum amount of creditable qualified wages are increased to $10,000 for any quarter, thus, the maximum credit per employee in 2021 is $14,000 ($7,000 in Q1 + $7,000 in Q2).
- Whereas the eligibility test in 2020 was based on partial or full suspension of business operations, or significant decline in gross receipts for at least 50%, the 2021 ERTC only requires a decline of more than 20% compared to the same quarter in 2019. Thus, it should be noted that, in the first quarter of 2021, a business would compare its receipts to the first quarter of 2019 not the first quarter of 2020. If the employer was not in business at the beginning of the relevant quarter in 2019, the same quarter in 2020 is substituted.
- Whereas in 2020 ‘’qualified wages’’ was mainly determined on whether a business has more or less than 100 FTEs, the 2021 rules have increased the threshold number from 100 to 500. Thus, businesses with up to 500 FTEs will have all their employees’ wages be qualified in 2021. Moreover, a provision in the new ERTC Act allows employers to increase pay (i.e bonuses) to their employees during an eligible quarter to increase credit, still subject to the $10,000 per quarter cap.
- Finally, a new rule is added for small employers to receive the credit in advance instead of reducing it from their employment tax deposits.
There is certainly much debate and confusion over the new rules of ERTC. As we expect the IRC to issue guidance in the coming days, Levine and Associates will continue to provide you with timely updates and tips.
Should you wish to know more about the 2021 Consolidated Appropriations Act and PPP, check out our previous articles https://levineandassoc.com/blogs or sign up to our newsletter.
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