The employee retention tax credit (ERTC) is intended to provide liquidity to employers during the pandemic and was greatly expanded in the Consolidated Appropriations Act of 2021 thanks to Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act portion, opening the doors to more businesses to be able to qualify for and receive this credit who are facing significant hardship as a result of the coronavirus pandemic. Many changes from the original credit were enacted including an expansion in the amount of credit and business eligibility, and how it plays with the Paycheck Protection Program (PPP).
Here’s what you need to know about this credit, how it works, and how to apply. Note that when a provision is designated as effective Jan. 1, 2021, it does not apply to any retroactive credit claims.
Who is eligible for the ERTC?
The following businesses and organizations engaged in a trade or business are eligible to qualify for the ERTC:
- For-profit businesses
- Tax-exempt organizations
- Certain government entities that are state or local-run (Effective Jan. 1, 2021, previously no government entity at any level was eligible):
- Colleges or universities
- Organizations providing medical or hospital care
- Certain organizations charted by Congress (such as Fannie Mae, FDIC, Federal Home Loan Banks and Federal Credit Unions)
How does my business qualify for the ERTC?
An eligible organization can qualify for the ERTC if:
- Their operations are fully or partially suspended due to a lockdown order, OR
- Their gross receipts are less than 80% for a quarter in 2021 or immediately compared to the same quarter in 2019 (or 2020 if the business was not open in 2019) or, there is a 20% drop quarter-over-quarter when comparing Q1 of 2021 to Q4 of 2020 compared to Q4 of 2019.
The gross receipts test is Effective Jan. 1, 2021, this is an increase from the previous law and expands the threshold for eligible businesses.
Effective Jan. 1, 2021, businesses with 500 employees or less are eligible to claim the credit even if an employee is working during the first two quarters of 2021 (an increase in the threshold from 100 employees in the original law). For affiliated companies sharing more than 50% common ownership, the 500 count is aggregated.
What is the time period for the credit, and when can I start collecting?
The passage of the bill at the end of December extended the availability of the ERTC through the first two quarters of 2021, allowing for more relief as the pandemic continues on. Qualified wages paid after March 12, 2020, and before July 1, 2021, are eligible for the credit.
Additionally, the new law will allow for an advanced credit for companies with 500 or fewer employees, allowing these companies to monetize the credit before wages are paid. The amount is based on 70% of the average quarterly payroll for the same quarter in 2019, and if there is excess advance payment, companies will need to repay the credit to the government.
How much credit can I receive?
Effective Jan. 2021, 70% of qualified wages are eligible for the ERTC including the cost to continue providing health benefits (such as if an employee is on furlough). This is an increase from the 50% provided in the previous stimulus bill. The qualified wage limit was increased to $10,000 per quarter per employee for the first 2 quarters of 2021. Previously was $10,000 per employee for the entirety of 2020.
Also, effective Jan. 1, 2021, the credit maxes out at an aggregate $14,000 per employee, or $7,000 for the first two quarters of 2021, and is available even if the employer received the maximum credit for wages paid to the same employee in 2020. This is an increase from the $5,000 max in the previous bill.
Additionally, the credit is now available for certain pay raises including hazardous duty pay increases (previously not allowed and is retroactive).
Be aware, however, that wages and health insurance benefits claimed to generate the ERC cannot be claimed to generate certain other credits, specifically the Research & Development Credit.
Is the credit taxable?
Yes, the ERC credit is subject to income tax. Wages on the claimed credit must be reduced by the amount of the credit, which results in the credit being taxable income. The reduction in wages may also impact Section 199A eligible wages for purposes of the 20% qualified business income deduction.
How does my PPP loan factor in?
First and foremost, companies with PPP loans can now also claim the ERTC, and the change is retroactive to the effective date of the original law (March 12, 2020). Key to note is that the ERTC cannot be applied toward wages covered by the PPP.
If, for example, your business received a PPP loan in 2020 and paid qualified wages in excess of the PPP loan amount, you could qualify and apply for the ERTC through an amended employment tax return (Forms 941X). This also applies to affiliate companies related to a PPP borrower. Furthermore, if your PPP payroll costs are not forgiven, those same payroll costs can be applied toward ERTC qualified wages. Your accountant can help you calculate and designate these costs.
Claiming the ERTC, with or without a PPP loan, requires careful calculation and documentation. Contact us for assistance with this credit.
Stay safe and healthy!
Walter & Shuffain, P.C.