Newburg Staff Writers-January 4th, 2021 (1:00 PM)
The latest stimulus package signed into law on December 27, 2020 under the Consolidated Appropriations Act of 2021 (the ‘Act’) provides some favorable enhancements to the Employee Retention Tax Credit (ERTC). The credit initially provided a 50% refundable tax credit for companies that continue paying their employees, even though the business might be closed due to a COVID-19 lockdown, or suffering a significant decline in gross receipts due to loss of business. This credit was capped at $5,000 per employee (50% x $10,000 qualified wages). The Act now includes some retroactive changes to the CARES Act retention credit and further extends provisions into 2021 in a more favorable modified form.
We have detailed below the new enhancements impacting the ERTC under the new Act :
- The new ACT now allows employers who receive PPP loans to also qualify for the ERTC. Please note the following details regarding ERTC and PPP integration :
- The same wages that were utilized under PPP forgiveness cannot be used for the ERTC (prevents double dipping).
- The change is retroactive to the effective date under the original law (for wages paid after March 12, 2020).
- 2020 amended payroll returns can be filed in certain cases. A Company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages and is otherwise eligible to claim the credit, may be able to file an amended return to claim the credit.
- Companies related to a PPP borrower that did not claim the credit due to an ‘affiliated’ company sharing common ownership should also be entitled to potential credit and filing of amended payroll tax returns.
- The ERTC originally applied to wages paid between March 12, 2020 and December 31, 2020. Under the Act, the period is extended to July 1, 2021.
- For wages paid between January 1, 2021 and before July 1, 2021:
- The credit is increased from 50% to 70% of qualified wages
- Each employee’s allowable wage amount increases from $10,000 per year to $10,000 per quarter
- Effective January 1st, 2021, the credit cap is increased to $7,000 for each of the first two quarters during 2021 (70% credit rate X $10,000 qualified wages) As a result the maximum credit for 2021 will be $14,000.
- The Act also increases eligibility by reducing the required gross receipt decline benchmark from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
- For 2021, the gross receipts test is satisfied for any quarter of the first half of 2021 in which gross receipts is less than 80% of the same quarter in 2019. Thus, in the first quarter of 2021, a business would compare its receipts in that quarter to the first quarter of 2019, NOT the first quarter of 2020. The comparison to 2019 rather than 2020 better aligns the overall objective as in all likelihood, gross receipts for Q2 of 2019 will be significantly higher than those of Q2 of 2020, making it easier to establish an eligible quarter.
- Effective Jan. 1, 2021, the employee threshold will be raised to 500 employees, so that for the first two quarters of 2021, a company with 500 or fewer employees will be eligible for the credit, even if employees are working (formerly limit was 100 employees).
- Allowing of an advance payment of the credit for companies with 500 or fewer employees based on 70% of average quarterly payroll for the same quarter in 2019.
- Allowing the credit for hazardous duty pay increases. In addition, group health care costs now count as qualified wages even if no other wages are paid to an employee. This brings the cost of furloughed employees into the calculation of the ERTC and is retroactive to March 13, 2020.
The retroactive changes within the ERTC enhancements particularly with respect to those companies that received PPP loans could provide some needed refund opportunities. Recipients of the PPP should review how their payroll costs might be covered by both provisions in order to determine potential amended payroll filings. We can work collaboratively with your payroll provider and assist you in navigating some of these complexities.
Please contact us should you have any questions.