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Expanded Employee Retention Credit (ERC)

Calling ALL Business Owners (especially Restaurants, Retail, Gyms & Salons) Did you know that your business now may be eligible for Employee Retention Tax Credits for 2020 & 2021 even if you received a PPP Loan?

The Internal Revenue Service is urging employers to take advantage of the newly-extended Employee Retention Credit (ERC), designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

In other words, your business may now be eligible for a bigger payroll tax credit.

We strongly recommend that you work with a Certified Public Accountant (CPA) to navigate the new opportunity – both retroactive to 2020 and the first two quarters of 2021. If you are unable to use a CPA we recommend contacting any local business development center for assistance, such as the Salt Lake City Small Business Development Center, Suazo Business Center, or Utah Women’s Business Center.

What changed?

On Dec. 27, 2020, Congress enacted a COVID-19 relief bill (the Consolidated Appropriations Act CAA, 2021) including the Taxpayer Certainty and Disaster Tax Relief Act of 2020. It made a number of changes to the employee retention tax credits previously made available under the CARES Act, including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021.

TIME PERIOD AVAILABILITY

  • Original Law: For qualified wages paid after March 12, 2020, and before Jan. 1, 2021.
  • New Law: For qualified wages paid after March 12, 2020, and before July 1, 2021, extending availability of the credit to the first two quarters of 2021.

AMOUNT OF CREDIT

  • Original Law: 50% of the qualified wages paid to the employee, plus the cost to continue providing health benefits to the employee.
  • New Law: Effective Jan. 1, 2021, the credit amount is increased to 70% of qualified wages, which is amended to include the cost to continue providing health benefits.

MAXIMUM CREDIT AMOUNT

  • Original Law: The credit was capped at $5,000 for all qualified wages paid during 2020 (the credit for $10,000 in qualified wages X 50% tax credit rate).
  • New Law: Effective Jan. 1, 2021, the credit cap is increased to $7,000 for each of the first two quarters of 2021 ($10,000 in qualified wages X 70% tax credit rate), so that the maximum credit for 2021 will be $14,000. This aggregate $14,000 per employee maximum credit for the first two quarters of 2021 is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

ELIGIBILITY REQUIREMENTS

  • Original Law: Business operations that are either fully or partially suspended by a COVID-19 lockdown order; or, for any quarter in 2020, if gross receipts are less than 50% of gross receipts for the same quarter in 2019.
  • New Law: Effective Jan. 1, 2021, business operations that are either fully or partially suspended by a COVID-19 lockdown order, or for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019. Many additional businesses will be eligible for this credit due to the lowering of the bar on reduction in gross receipts (from a 50% reduction in gross receipts to a 20% reduction) compared to the same quarter in 2019, before the pandemic.

PPP LOAN ELIGIBILITY

  • Original law: A company that received a Paycheck Protection Program (PPP) loan was not eligible for the employee retention credit. This disallowance rule extended to all affiliated companies that shared common ownership, so that if one company received a PPP loan, any other company with more than 50% common ownership was ineligible to claim the credit.
  • New Law: A company that receives a PPP loan is no longer prohibited from claiming the employee retention tax credit; however, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven (no double dipping). This change is retroactive to the effective date under the original law (for wages paid after March 12, 2020).

ADVANCE PAYMENTS

  • Original Law: No provision to monetize the credit before qualified wages were paid.
  • New Law:  Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.

PAPERWORK NEEDED FROM THE GOVERNMENT

Part of the required paperwork is proof that your business encountered a full or partial suspension of services as a result of orders from a governmental entity.  Here is the link to that paperwork:

How the Expanded Employee Retention Credit Will Save Small Businesses” – February 2021 https://news.bloombergtax.com/daily-tax-report/how-the-expanded-employee-retention-credit-will-save-small-businesses

  • Some of the early inefficacy of the CARES Act’s attempt to save small businesses resulted from an attempt to prevent double-dipping. Initially, companies that received a Paycheck Protection Program (PPP) loan were ineligible for an Employee Retention Credit (ERC), forcing many business owners into an either/or dilemma. The Consolidated Appropriations Act 2021 rectified this by repealing this provision; PPP loans and ERCs are no longer mutually exclusive. This change is effective retroactive to the CARES Act original date, March 12, 2020. Eligible businesses that received a PPP loan in 2020 can claim the credit retroactively.
  • The new Employee Retention Credit has a higher potential payout; the initial program provided a credit of up to $5,000 per qualifying employee. Since Jan. 1, 2021, the cap increased to $7,000 per qualifying employee for the first two quarters of 2021. Small businesses that hit the $5,000 cap during 2020 are still eligible for the increased cap in 2021.
  • The CARES Act failed to provide the ERC to businesses as an advance before they paid their wages; the credit would often come too late to make a difference. In the coming weeks, the IRS is expected to draft guidelines on providing credit advances to qualifying businesses with 500 or fewer employees.
  • For 2021, the ERC eligibility requirements have been loosened to accommodate more businesses. For 2020, eligibility extended only to businesses experiencing a reduction in income of at least 50% compared to the same quarter in 2019. The expanded program now only requires an income reduction of 20% compared to the same quarter in 2020. Also, the original ERC was only available to businesses with no more than 100 active, non-furloughed workers in 2020. As of Jan. 1, 2021, the threshold stands at 500 workers.

En Espańol: “Crédito extendido y ampliado por retención de empleados”  https://www.notiulti.com/credito-extendido-y-ampliado-por-retencion-de-empleados-tanner/

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