What’s better than PPP? PPP + ERC! – Expansion of the employer retention credit under new law

The CARES Act supports certain employers that operate a business during 2020 and retain employees with an employee retention credit. The tax credit is equal to 50% of qualified wages paid to employees after March 12, 2020, and before Jan. 1, 2021.

On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA, 2021) was signed into law. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the Employee Retention Credit (ERC) provided by the CARES Act.

Expansion of the Employer Retention Credit under the TCDTR

Beginning on January 1, 2021 and through June 30, 2021, TCDTR extends and expands the following CARES Act provisions:

  • Increases the ERC rate from 50% to 70% of qualified wages
  • Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility
  • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter
  • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees
  • Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
  • Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit and
  • reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee
  • provides that employers who receive a Paycheck Protection Program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds.

All employers are eligible for the employee retention credit, including tax-exempt organizations. There is no size limitation or threshold. However, state and local governments and their instrumentalities and small businesses that take small business loans are not eligible.

Qualifying employers must be either:

  • an employer whose business is fully or partially suspended by a government order related to COVID-19 during the calendar quarter; or
  • an employer whose gross receipts are below 50% of the comparable quarter in 2019. However, when the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.

The credit is calculated quarterly. It is 50% of qualifying wages paid, up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages are not limited to cash payments, but also include a portion of the cost of employer provided health care.

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