COVID-19 Relief Bill Provides Favorable Changes to the Employee Retention Credit

Written by Ian Merwin, J.D.. Updated Jan 12, 2021.

ERC

Signed into law on December 27, 2020, the Covid-19 relief bill contains a favorable update to the Employee Retention Credit (“ERC”). The Employee Retention Credit was one of the more successful components of the CARES Act, but there are several significant updates to the credit that are even more favorable for qualified businesses. Several updates can be seen below, along with a comparison to the credit terms under the CARES Act. Unless stated otherwise, the effective date of the provisions covered by the new law will be January 1, 2021.

Learn More: PPP Loan Forgiveness and the R&D Tax Credit 

 

ERC now available from March 12, 2020 through June 30, 2021.

Under the CARES Act, the covered period included wages paid after March 12, 2020 and before January 1, 2021.

Under the new law, the covered period has been extended to include wages paid before July 1, 2021.

PPP recipient can now qualify for ERC…..retroactively for wages paid after March 12, 2020, and going forward through June 30, 2021.

Under the CARES Act, a company that received a PPP loan was not eligible to claim the Employee Retention Tax Credit.

Under the new law, a company that receives a PPP loan will be eligible to claim the Employee Retention Tax Credit. This change can be applied retroactively to wages paid after March 12, 2020, the effective date of the law under the CARES Act. However, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.

Going forward, gross receipts eligibility determination drops from 50% to 20% allowing more businesses to qualify for ERC.

Under the CARES Act, business operations either needed to be fully or partially suspended by a Covid-19 lockdown order or have a reduction of gross receipts of at least 50% when compared to the same quarter in 2019.

Under the new law, business operations either need to be fully or partially suspended by a Covid-19 lockdown order or have a reduction of gross receipts of at least 20% when compared to the same quarter in 2019.

Allows a company to elect to use the gross receipts from the immediately preceding quarter and compare these prior quarter gross receipts to the same quarter in 2019, rather than the current quarter.

For example, a company wants to determine whether they are eligible for the ERC under the gross receipts test to satisfy the ERC eligibility in the 1st quarter of 2021. The company can consider two options: (1) compare the 1st quarter 2021 gross receipts to the gross receipts from 1st quarter 2019 or (2) compare the 4th quarter 2020 gross receipts to the gross receipts from the fourth quarter of 2019.  If either test shows a more than 20% decline, the company is eligible for the ERC in the first quarter of 2021.  Option (2) would require the company to make an election.

Preferred treatment to businesses with no more than 100 employees has been expanded to businesses with no more than 500 employee beginning January 1, 2021.

Under the CARES Act, for companies with more than 100 employees, only wages paid to employees not to provide services during an eligible quarter were determined to be “qualified wages.” A company with 100 or fewer employees could treat all wages paid to employees during an eligible quarter as “qualified wages.”

Under the new law, a company can have up to 500 employees and still be eligible to treat all wages paid to employees during an eligible quarter as “qualified wages.” Conversely, if a business has more than 500 employees, only wages paid to employees not to provide services during an eligible quarter will be treated as “qualified wages.”

Allowed percentage of wages increases from 50% to 70% of the $10,000 of qualified wages allowing for an increased credit amount.

Under the CARES Act, a company could include up to 50% of the qualified wages paid to each employee.

Under the new law, a company can include up to 70% of the qualified wages paid to each employee.

Beginning on January 1, 2021, the maximum credit allowed per employee in 2021 increased to $14,000 …. Even if that same employee received the previous $5,000 maximum in 2020.

Under the CARES Act, the maximum amount of wages that could be claimed toward the credit was capped at $5,000: $10,000 per employee multiplied by the 50% tax credit rate.

Under the new law, the maximum amount of wages that can be claimed toward the credit is capped at $14,000 per employee: $10,000 per employee per quarter multiplied by the 70% tax credit rate. 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

New provision on the way to allow businesses with no more than 500 employees to receive advanced payments.

Under the CARES Act, no business was eligible for advance payments of the credit.

Under the new law, if a business has 500 or fewer employees, the business may elect to take advance payments based on 70% of the average quarterly payroll for the same quarter in 2019. This will allow businesses to claim the credit before wages are actually paid to their employees. Of course, if the amount of the advance payment is greater than the actual credit determined at the end of the quarter, then the business will need to repay the excess advance payment amount to the government.

New provision on the way to allow businesses to claim certain pay rate increases as part of the credit.

Under the CARES Act, there is no credit for pay rate increases.

Under the new law, the disallowance of the credit for pay rate increases has been repealed, allowing the credit for hazardous duty pay increases, among others.

Allows certain government entities to qualify for ERC.

Under the CARES Act, the employee retention credit was not available to any federal, state, or local governments, or any agency or instrumentality thereof.

Under the new law, the disallowance of the following entities are eligible for the credit:

  • Public colleges
  • Organizations providing medical or hospital care
  • Certain organizations charted by Congress, Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions

New law references IRC§ 6033 in defining gross receipts.

Under the CARES Act, no definition of gross receipts applicable to tax exempt entities was included.

Under the new law, gross receipts includes contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income. (Note: Gross receipts are not reduced for any associated costs or expenses).

Excludes wages used to calculate other specific tax credits.

Previous law prevents employees qualified for the work opportunity tax credit (WOTC) to be included for purposes of the ERC and excluded any wages considered for the ERC for paid family and medical leave credit under Section 45S.

The new law excludes any wages from the ERC if they were used for:

  • R&D tax credit (§41)
  • WOTC (§51)
  • Empowerment Zone (§1396)
  • Indian employment credit (§45A)
  • Employer Differential Wage Payment Credit (§45P)
  • Family and medical leave credit (§45S)

Overall Impact

When considering the updated provisions as a whole, it is clear that the number of businesses that are eligible to claim the Employee Retention Credit has been greatly increased. Allowing businesses to receive PPP loans and still be eligible for the credit, decreasing the reduction in gross receipts necessary to be eligible for the credit, and increasing the number of employees an eligible business can employ are all factors that have expanded the numbers of businesses that are eligible for the credit.

For more information or other tax questions, please consult a tax specialist.

 

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Topics: Employment Incentives, Legal News, COVID-19

Ian Merwin, J.D.

Written by Ian Merwin, J.D.

Ian is an experienced, licensed law practitioner who further boosts CTI's depth of knowledge as Research and Development (R&D) tax credit specialists. From a solid foundation built on his J.D. with honors from the University of Texas School of Law, and a Masters in Tax Law from New York University School of Law, Ian excels at applying current tax law and recent court decisions to maximize and substantiate R&D credit claims for clients.