The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), passed on December 27, contains several important changes to the Employee Retention Credit (ERC). The CARES Act, passed in early 2020, created the ERC and forbade Paycheck Protection Program loan recipients from claiming an ERC. As a result of the CARES Act, many companies that have received PPP loans may have lost sight of credit.
The TCDTRA changes the ERC and now allows PPP loan recipients to claim the loan. For PPP loan recipients, there is now the option of using this loan retrospectively for 2020 if they are otherwise entitled. In addition, the TCDTRA is extending the ERC until June 30, 2021 and modifying the calculation for 2021 so that it is even more valuable than for 2020.
The ERC for 2020
The ERC for 2020, as originally enacted by the CARES Act, provides companies with a maximum credit of $ 5,000 per employee.
Which wages qualify?
- Wages must be paid between March 12, 2020 and December 31, 2020.
- Health benefits paid for employees are also eligible.
- The maximum credit is 50% of the first $ 10,000 paid to each employee.
- The same wages cannot be used to get both ERC and PPP loan waivers.
- For companies with fewer than 100 full-time employees, all wages are deductible. For companies with more than 100 full-time employees, only the wages paid to employees who do not provide services apply.
- The wage must be paid in a qualifying quarter.
What is a qualifying quarter?
- A quarter in which business operations are wholly or partially ceased by order of the authorities.
- The wages are to be paid during the shutdown period. If a closure is in effect from May 1st through May 31st, only wages paid during those dates will qualify.
- A quarter in which the company has seen a significant drop in gross income.
- A decline in gross income is defined as a quarter in which gross income is less than 50% of the corresponding quarter in 2019.
- A company will qualify by the end of a quarter in which gross earnings reach 80% of the 2019 amount.
Special rules for jointly controlled groups
In the case of a group of companies that are considered to be a single employer by virtue of joint control, the controlled group must be considered as one for various aspects of the credit calculation.
- In determining whether a company will be closed due to an official order, the entire controlled group is considered to be partially suspended when a company is closed.
- The gross access test must be calculated using the gross additions of the entire control group.
- When determining the number of full-time employees, the entire control group must be taken into account.
Changes to the ERC for 2021
The TCDTRA extends the ERC until June 30, 2021. Wages paid between January 1, 2021 and June 30, 2021 now qualify and are subject to the new, cheaper credit calculations.
- The wages that qualify for the ERC will be increased to $ 10,000 per employee per quarter (instead of $ 10,000 per employee per year).
- The credit calculation increases to 70% of the wages paid to an employee (instead of 50%).
- In 2021, companies can receive a maximum credit of $ 7,000 per employee per quarter or $ 14,000 for 2021.
- A significant decrease in gross receipts is now defined as any quarter in 2021 in which gross receipts are less than 80% of the corresponding quarter in 2019.
- To determine the entitlement to credit, it is chosen to use the gross income of the immediately preceding quarter. For example, to determine if a company qualifies for the first quarter of 2021, a company can compare the fourth quarter of 2020 to the fourth quarter of 2019.
- For companies with fewer than 500 full-time employees, all wages are eligible. For companies with more than 500 full-time employees, only wages paid to non-service workers are eligible.
- Companies with fewer than 500 full-time employees can take advantage of the prepayment of the loan. The maximum amount of the advance is 70% of the average quarterly wage in 2019.
Additional guidance from the IRS is expected
There are several unanswered questions raised by the ERC changes. For example, what should a company do if it has already applied for a PPP loan waiver? Since the same wages cannot be used to apply for both the loan and PPP loan waiver, do companies have the option to change their PPP loan waiver applications? Further clarification is needed to determine the eligible wages for the ERC for those who have already applied for or received a PPP loan waiver. With so many unanswered questions, companies should wait to submit applications for PPP loan waivers until more information about the ERC is available.
Additional IRS guidance is also needed to determine how a company will claim retroactive credit for 2020, whether by filing amended 941 forms or calculating a catch-up credit to be reported on the final 941 for 2020.
The changes to the ERC represent a valuable opportunity for certain PPP loan recipients who had not previously qualified. We recommend that you consult a WilkinGuttenplan tax advisor to discuss your eligibility.
Stephanie Holston, CPA, is a manager at WilkinGuttenplan.