The $900 billion Consolidated Appropriations Act, 2021 (CAA), which became law in December, provides additional pandemic-related financial relief to individuals and small businesses and addresses the disputed tax deductibility of business expenses paid with forgiven loans.
Of particular interest to businesses are the changes the CAA makes to the 2020 CARES Act rules related to the employee retention credit (ERC). The CARES Act ERC offered eligible employers (those that partially or fully suspended operations due to pandemic-related government actions or had a greater than 50% reduction in gross receipts during any one quarter) a credit equal to 50% of all qualified wages that are paid to employees between March 12, 2020 and December 31, 2020. Employers who averaged fewer than 100 employees are eligible for the credit if they had a 50% decline in revenues. Employers who averaged more than 100 employees are only eligible for the credit if they had a 50% decline in revenues and were paying employees who were not performing services.
The most notable changes made by the CAA were related to eligibility for companies that received a PPP loan. The CARES Act and IRS previously determined that employers that received a PPP loan were disqualified from receiving an ERC. The CAA clarified that, while PPP loan forgiveness and the ERC cannot be claimed for the same eligible expenses, the wages paid by the employer after the PPP loan funds were completely spent on qualified wages are eligible for the ERC.
The CAA extends the ERC to cover qualified wages paid through June 30, 2021. In addition, for wages paid between January 1, 2021 and June 30, 2021, the CAA:
- Increases the credit to 70% of qualified wages.
- Increases the employee wage cap from $10,000 for all calendar quarters in 2020 to $10,000 for each quarter in 2021 (resulting in up to $14,000 of credits being available to a qualified employer for qualified wages paid to each employee during 2021).
- Changes the reduction in gross receipts from more than 50% to more than 20%.
- Gives employers the option to determine its eligibility for the ERC as a result of a significant decline in gross receipts in the prior quarter instead of the current quarter.
- Increases the number of full-time employees receiving qualified wages when they could not work from 100 to 500 full-time employees.
- Extends eligibility to certain government employers, including 501(c)(1) organizations, colleges/universities and medical providers.
- Allows employers not in existence in 2019 to consider the gross receipts in the corresponding quarter in 2020.
- Enables an eligible employer that averaged 500 or less full-time employees during 2019 to elect to receive an advance payment of the ERC in an amount not to exceed 70% of the average quarterly wages they paid in 2019.
- Amends the CARES Act so that payroll costs used to determine the amount of PPP Loan forgiveness will not include payroll costs for which the ERC was claimed. An employer can waive the ERC in order to obtain forgiveness for PPP Loan proceeds. Employers that received PPP Loans may now also claim the ERC, so long as they do not claim PPP Loan forgiveness for payroll costs for which the ERC was claimed, and such employers should consider filing amended employment tax returns in order to claim the credit for wages paid in 2020.
- Eliminates the CARES Act rule that an employer is not eligible for the employee retention credit if they or their affiliate received a PPP Loan. It had been unclear whether an eligible business that acquired an entity that received a PPP Loan would then become ineligible. The CAA clears up that uncertainty.
The ERC is claimed on IRS Form 941; the 2020 fourth quarter filing is due on January 31, 2021. Speak with your payroll provider or a WBL advisor to determine if action is necessary before your filing is complete or if amended returns are warranted for the 2020 year.