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ERC expanded into 2021 with possible 2020 refund potential

The CARES Act passed last March established an Employee Retention Tax Credit (ERC) for certain businesses to claim for 2020. The Consolidated Appropriations Act passed in December extended that credit through June 30, 2021. In addition, it opened up the possibility of filing amended payroll tax returns in 2020 if the credit was not originally claimed. Following is an overview of the ERC.
Under the CARES Act – Where We’ve Been
  • Authorized a refundable credit against employment taxes (i.e., the employer share of the social security tax) equal to 50% of qualified wages that an eligible employer paid to employees between March 13, 2020 and December 31, 2020.
  • The maximum wages (including certain health plan expenses) per employee were limited to $10,000 for the year and thus the credit per employee was limited to $5,000.
  • To be an eligible employer, it had to experience one of the following during 2020:
    • A 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 (e.g., PA Governor Wolf issued such an order) or,
    • A significant decline in gross receipts as follows:
      • A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. 
      • The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019. 
  • To have qualified wages, it depended on how many employees a business had, generally as follows: 
    • If an employer had more than 100 full-time equivalent employees during 2019, qualified wages only included those paid to employees that “are not providing services.”
    • If an employer had 100 or fewer full-time equivalent employees during 2019, qualified wages included those paid to “all” employees regardless of whether the employees were providing services.
  • An employer who received a Paycheck Protection Program (“PPP”) loan was not eligible to claim the ERC. 
  • An employer claiming the paid sick and family leave credit, the paid family and medical leave credit and/or the work opportunity credit had further restrictions on claiming the ERC.
  • The limitations above caused many businesses to not be eligible to claim the ERC. But then came to the rescue the Consolidated Appropriations Act of 2021! 
Under the Consolidated Appropriations Act – Where We’re Going
For 2020:
  • Employers who received a PPP loan in 2020 may now be eligible retroactively for a 2020 ERC credit. However, any wages that are included in “payroll costs” for purposes of PPP forgiveness will not qualify for the ERC.  
  • ACTION needed: 
    • For every 2020 PPP borrower, an assessment needs to be made as to whether it would have had ERC eligibility, notwithstanding the PPP restriction, and to analyze the interplay between wages related to PPP forgiveness vs. ERC eligibility.
    • If an ERC opportunity exists for 2020, amended Form 941s may be warranted. Congress directed the IRS to issue guidance immediately, so we can expect guidance on this soon.  There is a possibility that the IRS will allow a 2020 catch up on Form 941 due January 31, 2021. Stay tuned.
For 2021 (through June 30, 2021):
  • The Consolidated Appropriations Act meaningfully changed the “computational” rules related to the ERC. As such, businesses that didn’t qualify during 2020 may in 2021.
  • A summary of computational changes include:
    • Credit % is increased from 50% in 2020 to 70% in 2021.
    • Qualified wages increased from $10,000 annual limit in 2020 to $10,000 quarterly limit in 2021, thus increasing the maximum wages for 2021 to $20,000 ($10,000 per quarter x 2).
    • The significant decline in gross receipts definition is changed from a more than 50% reduction in 2020 vs. 2019 to a more than 20% reduction in 2021 vs. 2019 (not 2020!). An option also exists (for 2021 Q1) to measure the more than 20% reduction by comparing the fourth quarter of 2020 to the fourth quarter of 2019. What impact that election has on 2021 Q2 computation is to be determined.
    • The 100 full-time equivalent employee standard in 2020 is raised to a 500 full-time equivalent employee standard for 2021.
  • If a business qualifies for a 2021 ERC, an opportunity exists to get an “advance payment” on such credit by filing Form 7200. Details on this are beyond the scope of this article.
  • Similar to 2020, 2021 PPP borrowers are restricted from claiming an ERC and PPP loan forgiveness on the same wages so this will need to be analyzed. 
With either 2020 and/or 2021, coordination will certainly be needed with your payroll provider if your business qualifies for the ERC. Further guidance on implementation is likely forthcoming. In the meantime, we at Sisterson stand ready to help you in any way that we can.