The Consolidated Appropriations Act passed December 27, 2020 included an expansion of the 2020 Employee Retention Credit (ERC). The credit is now retroactive to the enactment of the CARES Act, March 21, 2020, and is available to employers who received PPP loan funding.
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business and experience either:
- the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- a significant decline in gross receipts.
The 2020 ERC as provided in the CARES Act is 50% of wages (including certain health plan costs) paid to each employee up to $10,000 annually. Employers must have experienced a 50% decline in gross receipts in any calendar quarter of 2020 as compared to the same quarter in 2019. The employer is eligible to take the credit for that quarter and future quarters as long as the gross receipts in future quarters are less than 80% of the gross receipts as compared to the same quarter in 2019. For employers with greater than 100 employees, eligible wages are only those paid to employees that are not providing services. An eligible employer claims the credit by filing Form 941-X for the applicable quarters of 2020.
The Consolidated Appropriations Act extended the credit for wages qualified wages paid through June 30, 2021 and expanded the dollar amount to 70% of up to $10,000 in qualified wages per employee per quarter. The current law defines “significant decline” as a reduction in revenues of only 20% compared to the same quarter in 2019. The limit to wages paid only to employees that are not providing services now only applies to employers with greater than 500 employees. The credit is taken by filing Form 941 for applicable quarters of 2021.
Coordination of PPP funding and the ERC
Qualified wages for the ERC cannot be the same dollars of payroll costs used for PPP loan forgiveness. PPP borrowers may now want to maximize their non-payroll costs (up to 40% of the loan amount) to substantiate forgiveness rather than substantiating entirely by payroll costs. PPP Second Draw loan recipients expected to be eligible for ERC based on the 2021 qualifications can be planning for the use of funding for wages between the two programs.
If you feel your company meets the qualifications above and is eligible for the expanded ERC, please consult your JMF tax advisor.