The Employee Retention Tax Credit (ERC) was originally enacted as part of the CARES Act and is a refundable tax credit against an employer’s share of FICA taxes. It was designed to reward those companies who kept employees on the payroll.
The Consolidated Appropriations Act, 2021 made a number of changes to the ERC in Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act of 2020.
Section 206 of the law revises who may claim the ERC for the period after March 12, 2020 and before January 1, 2021. It does not change the calculation of the credit for that time period. Section 206 also provides some clarity on certain ERC provisions.
For the 2020 tax year, the Act, retroactive to the effective date of the CARES Act, does the following:
- Provides that employers who receive Paycheck Protection Program (PPP) loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds;
- Clarifies the determination of gross receipts for certain tax-exempt organizations; and
- Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.
Section 207 of the Act extends the ERC, which was originally scheduled to expire at the end of 2020, until June 30, 2021. More significantly, this Section of the Act modifies the calculation of the ERC for the first six months of 2021.
For January 1, 2021 through June 30, 2021, the modification of the credit includes:
- An increase in the credit rate from 50% to 70% of qualified wages;
- An increase in the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- A reduction in the required year-over-year gross receipts decline from 50% to 20%;
- A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
- A provision to allow certain governmental employers to claim the credit;
- An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
- Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.
For more help
We are waiting for additional guidance from the IRS on these changes, in particular for businesses that received a PPP loan who may now be eligible for the ERC retroactively and we will share more details as further clarification is provided. In addition, the Act provides for a public awareness campaign regarding the ERC by the Secretary of the Treasury in coordination with the Small Business Administration, so businesses with 500 or fewer employees will likely receive ERC information in the mail in the coming weeks. Please contact your GBQ tax representative should you have any questions or to discuss these changes further.
Article written by:
Lorani Orobitg, CPA
Manager, Tax & Business Advisory Services