The Taxpayer Certainty and Disaster Tax Relief Act of 2020, or TCDTRA, that was passed Dec. 27 contains several important changes to the Employee Retention Credit, or ERC. The CARES Act passed earlier in 2020 created the ERC and prohibited Paycheck Protection Program loan recipients from claiming an ERC. As a result of the CARES Act, many businesses that obtained PPP loans may have lost sight of the credit.
The TCDTRA amends the ERC and now allows PPP loan recipients to claim the credit. There is now an opportunity for PPP loan recipients to claim this credit retroactively for 2020 if they otherwise qualify. In addition, the TCDTRA extends the ERC to June 30, 2021, and modifies the calculation for 2021, making it even more valuable than for 2020.
The ERC for 2020
The ERC for 2020, as originally passed by the CARES Act, offers a maximum credit to businesses of $5,000 per employee.
What wages qualify?
- Wages must be paid between March 12, 2020, and Dec. 31, 2020.
- Health benefits paid for employees also qualify.
- The maximum credit is 50% of the first $10,000 paid to each employee.
- The same wages cannot be used to claim both the ERC and PPP loan forgiveness.
- For businesses with less than 100 full-time employees, all wages qualify for the credit. For businesses with more than 100 full-time employees, only wages paid to employees who are not performing services will qualify.
- Wages must be paid in a qualifying quarter.
What is a qualifying quarter?
- A quarter in which business operations are fully or partially suspended by government order.
- The wages must be paid during the period of shutdown. If a shutdown is in effect from May 1 through May 31, only wages paid during those dates will qualify.
- A quarter in which the business experiences a significant decline in gross receipts.
- A decline in gross receipts is defined as a quarter in which gross receipts are less than 50% of the corresponding quarter in 2019.
- A business will continue to qualify until the completion of a quarter in which gross receipts reach 80% of the 2019 amount.
Special rules for commonly controlled groups
For a group of businesses that are considered a single employer due to common control, the controlled group must be viewed as one for various aspects of the credit calculation.
- When determining whether a business is shut down due to government order, if one business is shut down, the entire controlled group is considered partially suspended.
- The gross receipts test must be calculated using the gross receipts for the entire controlled group.
- The entire controlled group must be considered to determine the number of full-time employees.
Changes to the ERC for 2021
The TCDTRA extends the ERC to June 30, 2021. Wages paid between Jan. 1, 2021, and June 30, 2021, now qualify and are subject to the new, more favorable credit calculations.
- The wages that will qualify for the ERC are increased to $10,000 per employee per quarter (instead of $10,000 per employee per year).
- The credit calculation increases to 70% of wages paid to an employee (instead of 50%).
- In 2021, businesses can receive a maximum credit of $7,000 per employee per quarter, or $14,000 for the year 2021.
- A significant decline 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.
- In order to determine eligibility for the credit, there is an election to use gross receipts of the immediately preceding quarter. For example, to determine if a business qualifies for the first quarter of 2021, a business may compare the fourth quarter of 2020 to the fourth quarter of 2019.
- For businesses with less than 500 full-time employees, all wages will qualify for the credit. For business with more than 500 full-time employees, only wages paid to employees who are not performing services will qualify.
- Businesses with less than 500 full-time employees can qualify for advance payment of the credit. The maximum amount of the advance is 70% of the average quarterly wages paid in 2019.
Additional guidance from the IRS is anticipated
There are several unanswered questions raised by the ERC amendments. For example, how should a business proceed if it has already filed for PPP loan forgiveness? Since the same wages cannot be used to claim both the credit and PPP loan forgiveness, do businesses have the opportunity to amend their PPP loan forgiveness applications? Further clarification is needed to determine the eligible wages for the ERC for those who have already applied for or received PPP loan forgiveness. Due to the number of unanswered questions, businesses should consider waiting to file any PPP loan forgiveness applications until further guidance regarding the ERC is received.
Additional IRS guidance also is needed to determine how a business claims a retroactive credit for 2020, whether by filing amended 941 forms, or calculating a catchup credit to be reported on the final 941 for 2020.
The amendments to the ERC present a valuable opportunity for certain PPP loan recipients who did not previously qualify. We recommend you consult a WilkinGuttenplan tax adviser to discuss your eligibility.
Stephanie Holston, CPA, is a manager at WilkinGuttenplan.