While much of the attention of the Consolidated Appropriations Act, 2021 (CAA 2021) was focused on the second draw PPP loan program, there was a small provision change that could have massive benefits for businesses that qualify. It may be easier to qualify for portions of the provision and should not be overlooked by businesses.
The Employee Retention Credit (ERC) was passed as part of the original CARES Act in March of 2020. The flagship business provision in the CARES Act was the Payroll Protection Program (PPP) loan program. The ERC was also introduced as well but was not very popular with businesses. Most businesses literally rushed out and obtained a PPP loan – and rightfully so. In almost all cases, the PPP loan was a larger dollar amount and was basically promised to be free money, if spent on approved expenses.
Here’s the important part – under the original CARES Act, if you obtained a PPP loan, the ERC was off the table altogether. You could not do both. Originally, both the PPP loan and the ERC were set to expire in 2020.
The ERC is a 50% credit on the first $10K of eligible wages per employee in 2020. To be eligible, your business had to have either a 50% reduction in gross receipts in any calendar quarter of 2020 compared to the same quarter in 2019 – OR – be shut down, or partially shut down, by a government order (federal, state, or local). But again, this was all off the table in its entirety if you took a PPP loan.
However, the CAA 2021, which was signed into law on December 27, 2020 changed everything. If businesses are eligible, they can now take BOTH the ERC and the PPP loan. Since both programs are based on payroll, the same payroll dollar cannot be used for both the credit and PPP forgiveness. We are now seeing guidance come out and define how these two programs, and the wages interact. Remember, these two programs could not interact prior to December 27, 2020.
For example, if you have 20 employees, and you qualified for the ERC in 2020 – you have the potential to receive another $100,000 ($10K qualified wages per employee X 50% credit X 20 employees) in addition to whatever PPP loans you may have or participate in going forward. But this all gets much, much, better.
The CAA 2021 also extended the ERC through June 30, 2021. In addition, the credit has been increased to 70% credit per $10K qualifying wages per employee, per quarter. Lastly, and possibly best of all, a business only has to have a reduction of gross receipts in excess of 20%, instead of the 50% needed in 2020, in either the first or second quarter of 2021 as compared to the same quarter in 2019. So yes, even if you don’t qualify in 2020 – if your business revenue remains 20% off from 2019 – you can potentially have $14,000 credits per each employee for 2021. So that business that received $100K in 2020 for 20 employees, could potentially receive another $280,000 of credits in 2021 for the same employees – again, regardless of their participation in the PPP loan.
Keep in mind, to qualify, you need the applicable reduction in gross receipts OR to be shut down, or partially shut down, by a government order (federal, state, or local). So, every restaurant, café, or eatery; every barber or hairdresser; every theater; every gym; anyone at least partially shut down as a “non-essential” business, anyone forced to operate at a percentage of capacity, would at least partially qualify.
The evaluation of the ERC MUST be calculated BEFORE you prepare your 2020 income tax return, and you CANNOT file for your PPP loan forgiveness or have it granted while you are evaluating the ERC. If you already had your PPP loan forgiven, you may not be eligible to claim any of the ERC for 2020. However, the AICPA is currently advocating to allow businesses that have already applied for PPP forgiveness to be able to claim the ERC credit as well. Please talk to your advisor first.
Lastly, there are a number of special rules for employers over 100 employees, 500 employees, seasonal businesses and businesses that started in 2019. Please talk to your advisor if you think you may be eligible for the ERC for 2020 or 2021.
While we are awaiting further guidance to be issued on this topic, we are tentatively planning a Zoom meeting for those businesses that think they qualify for the ERC. Please contact us if you would like to receive updates about future Zoom meetings or if you have questions.
