The Extension of Employee Retention Tax Credit
/Tax Alert 2021-3
The recently enacted Consolidated Appropriations Act makes several modifications to the employee retention tax credit (ERTC) originally provided under the CARES Act. Some of the modifications are retroactive to the March 27, 2020 effective date of the CARES Act.
The most significant change removes the restriction that prevents employers that obtained PPP loans from claiming the ERTC. This means that PPP borrowers who also qualify for the ERTC can claim the ERTC prospectively in 2021, and they can claim the ERTC retroactively for 2020, even though they were previously barred from claiming it because they obtained PPP loans.
Among other changes, the credit percentage and per-employee limitation have been increased – the new ERTC equals 70% of qualified wages paid in each of Q1 and Q2 of 2021, up to $10,000 of wages per employee per quarter, so the maximum credit per employee in 2021 is $14,000 ($7,000 in Q1 + $7,000 in Q2), versus $5,000 per employee in all of 2020.
Additionally, the eligibility has been expanded. Whereas the test for eligibility in 2020 was based on the existence of a partial or full suspension of operations, or a substantial (more than 50%) decline in gross receipts, the 2021 ERTC only requires a decline of more than 20% in quarter-over-quarter “gross receipts” (i.e., the same quarter in 2021 vs. 2019) to be eligible for that particular quarter. Moreover, employers may elect to use the prior quarter’s gross receipts to qualify (i.e., to test Q1 2021 eligibility, an employer can elect to compare Q4 2020 to Q4 2019).
Moreover, the hurdle for 2021 qualified wages has been moved to make it more favorable for employers with up to 500 full-time employees (FTEs). The 2020 rule counted wages for all employees for companies that averaged 100 or fewer FTEs, and for larger employers it included only wages for employees who were not providing services due to the suspension of operations or decline in gross receipts. Now, the 2021 threshold has been raised to 500 or fewer FTEs, so that wages of all employees in 2021 can be included for employers with up to 500 FTEs.
The combined effect of all these changes is significant for employers both large and small. There are new benefits to be had in 2021 as well as retroactive ones for 2020 in the case of PPP borrowers and those with furloughed employees.
We can help you to determine eligibility for this credit. Please contact us for more information.
