This article discusses the major changes to the employee retention tax credit (ERTC) specifically those related to January-June, 2021. The ERTC originated under the CARES Act back in March 2020. Not many companies took advantage of it, due to significant eligibility requirements and due to the fact that this relief element was mutually exclusive with PPP. Stated differently, if you took a PPP loan, you couldn’t take ERTC under the CARES Act.
The Consolidated Appropriations Act (CAA) signed in late December, changes everything and puts ERTC in play for many additional companies and tax-exempt organizations, especially for 2021.
To summarize these important changes:
Extension of the wage period
The CARES Act limited the application of ERTC to wages paid through December 31, 2020. The CAA extends the wage period for ERTC consideration to June 30, 2021.
PPP and ERTC are no longer mutually exclusive
The CAA lifts the ban on claiming ERTC if an employer also obtained a loan under the paycheck protection program (PPP), and this change is retroactive back to March 13, 2020. This means that PPP borrowers who qualify for the ERTC can claim the credit prospectively in 2021, and retroactively for 2020, even though previously barred due to getting a PPP loan. The big catch here is, employers cannot use BOTH PPP and ERTC on the SAME wages. Sorry, but no double- dipping allowed.
The credit amount is greatly expanded for 2021
The CAA increases the credit in 2021 to 70% of qualified wages up to $10,000 in EACH of Q1 and Q2 of 2021. So the maximum credit in 2021 under CAA is $14,000 ($7,000 in Q1 + $7,000 in Q2.) Under the old rules of the CARES Act, the maximum credit was $5,000 ANNUALLY.
Eligibility is greatly expanded in 2021
Under the CARES Act, eligibility was determined by either
• government-mandated shutdown order, or
• a decline in quarterly receipts of >50% in 2020 vs. the same quarter in 2019.
Under the more-recent CAA, those criteria are still in place for 2020 but are expanded for 2021. The 2021 ERTC only requires a decline of >20% in quarter-over-quarter gross receipts from 2021 vs. the same quarter in 2019. This brings many more employers into play for ERTC in 2021.
Further still, a special election allows employers to examine declines in quarterly gross receipts for the “immediately-preceding quarter” to ascertain ERTC 2021 applicability. Stated differently, for the first quarter of 2021, employers have the OPTION of examining Q4 2020 gross receipts vs. Q4 2019 in testing for the >20% decline in gross receipts.
The FTE limit is more favorable in 2021
The original CARES Act limited the credit opportunity for employers with > 100 FTEs, to only those wages paid to employees who were furloughed. In other words, larger employers had to pay employees to stay at home in order to use the credit.
The CAA greatly expands this by changing that threshold to 500 FTEs. Now, an employer with up to 500 employees can take the credit if the receipts decline is met, and not have to worry about whether the employee is paid to stay home.
Employee wages eligible for the credit include qualified health plan expenses. The CAA updates this to say health plan expenses are included as qualified wages, even if no wages were paid to an employee. This change may be more applicable to 2020 ERTC as it would bring in health plan expenses for furloughed employees.
The CAA also adds a provision to allow employers with <500 FTEs, to elect an advance payment of the 2021 ERTC in an amount not to exceed 70% of the average quarterly wages paid by the employer in calendar year 2019. Further guidance is still to come on this election.
How to claim the credit
Employers can be immediately reimbursed for the credit by reducing their required deposits of employment taxes, including employment and federal taxes withheld from the employees’ wages up to the amount of the retention credit. The CAA allows this with the intent of employers having the benefit of the credits immediately, instead of waiting for the quarterly filing and an IRS refund process.
Employers now have three separate major relief areas to at least consider. The interactions are complex, and too involved for this summary. The short story is, no double-dipping.
For instance, if an employer takes FFCRA credits on an employee who is out of work due to contracting COVID, they can’t also take ERTC on those same wages. If an employer qualifies for both PPP Round 2 AND ERTC, PPP application timing considerations could come into play to properly maximize benefits of each. Remember, for PPP Round 2, employers have the option of either 8 or 24-week periods for forgiveness and also have numerous other expenses aside from payroll that can be used to satisfy the loan. But no wage double-dipping on ERTC and PPP is allowed.
While no specific documentation is required to initially claim the credits, employers should develop a system to gather and maintain records of information such as the following:
• Calendar quarterly gross receipts documentation for 2019-2021
• Documentation of how the employer calculated the ERTC for each quarter
• Documentation on qualified health plan expenses allocated to wages
• Documentation on eligibility for the ERTC based on government-mandate or decline in gross receipts
The IRS has stated that documentations should be kept for IRS review for at least four years.