February 18, 2021
Client Letter: Consolidated Appropriations Act and
Employee Retention Credit
Dear Valued LattaHarris Clients and Friends:
The Employee Retention Credit (ERC) enhancements from The Consolidated Appropriations Act, 2021 (CAA) is a great opportunity for some of our clients and friends to greatly benefit from this recent piece of COVID relief. The ERC enhancements were summarized as part of a larger previous mailing but this is a significant enough topic to
address again separately as well as provide some updated information.
Prior to CAA, businesses could not receive both the ERC and a PPP loan – now they are eligible to use both programs simultaneously, as well as retroactively for 2020.
For 2020 a business had to show a decrease in gross receipts of 50% or greater for a calendar year quarter (still the case); for 2021 eligibility a business need only show a 20% or greater decrease.
For 2020 a business was eligible to claim a credit up to $5,000 total per eligible employee for the year; for 2021 a business is able to claim a credit up to $7,000 per eligible employee for each of the first two quarters. Thus, a total possible credit of $14,000 per employee for 2021.
The changes and enhancements from the CAA to the ERC will give many businesses that suffered a significant decrease in receipts a new opportunity to receive additional federal pandemic relief.
Employee Retention Credit in more detail:
Under the CARES Act (the federal law creating the benefit for 2020), the Employee Retention Credit (ERC) provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee for the year 2020. The credit is claimed from federal employment taxes and withholding payments or
advanced using IRS Form 7200. Qualifications included the full or partial suspension of business due to government order; or a significant decline (50%) in gross receipts compared to the same quarter in 2019. Per the CARES Act, a business was not allowed to benefit from both an ERC and a PPP loan. Thus, in most cases, businesses opted for the PPP loan as this was the more beneficial program.
The most significant resulting changes from the CAA for 2020 (as well as now for 2021) is that businesses are now eligible to participate in both a PPP loan and an ERC, plus businesses are also allowed to retroactively claim a 2020 ERC. The largest qualifying factor now is that businesses cannot use the same payroll dollars for both programs.
Accordingly, business owners should allocate their payroll dollars in order to generate the greatest overall financial benefit. At this time, it is still an unknown whether or not the IRS and SBA will do anything to assist businesses who have already filled for PPP forgiveness
and would now like to adjust their supporting documentation to best benefit from both programs simultaneously. The use of the ERC and PPP in tandem for 2020 is the only retroactive change from the CAA for 2020.
The CAA extends and expands the following ERC provisions from January 1, 2021, through June 30, 2021:
Increases the ERC rate from 50% to 70% of qualified wages;
Expands the eligibility for the credit by reducing the required year-over-year gross receipts “significant” decline from 50% to 20% and provides a safe harbor allowing employers to use Q4 2020 gross receipts to determine 2021 eligibility:
o The definition of gross receipts for purposes of the ERC typically includes:
Total sales (net of returns and allowances) and all amounts received
Any income from investments; incidental or outside sources:
i.e. interest, dividends, rents, royalties, and annuities.
Does not include loan proceeds or collection of sales tax.
o Note – this definition is different than that used for PPP Draw-2 qualification.
Increases the limit on per-employee eligible wages from $10,000 for the year to $10,000 for each quarter;
o Group health expenses and many associated subsets are includable as
o 70% of $10,000 for two quarters yields a potential $14,000 per employee benefit.
Wages must be adjusted for other CARES payroll credits – i.e. Families First Sick Leave and Family Leave credit as well as most other federal credits you may be receiving – no “double-dipping”;
Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
Allows certain public instrumentalities to claim the credit;
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 apply for an advance of 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;
S-Corp owner wages can be claimed for ERC;
o Owners with greater than 50% ownership may not claim the credit on their wages.
o Attribution rules also apply.
The ERC is like other payroll-related credits with the credit serving as a reduction to deductible payroll expenses for income tax purposes.
The maximum amount of this credit, per eligible employee, is $5,000 for 2020 and $14,000 for 2021.
In most cases, if the PPP and ERC are competing for eligible wages, the bigger benefit is using the wages toward the PPP first as this is a dollar-for-dollar matching where the ERC is a 50¢ for 2020 and 70¢ for 2021 benefit per wage dollar. Be certain and thoroughly document where each wage dollar comes from and where it is being used to incase your
business is ever selected for audit.
The above recap is made with the intention of trying to highlight some planning opportunities and pointing out that careful consideration is needed with respect to possible next steps involving the ERC and PPP under the new Consolidated Appropriations Act, 2021. Please note some of this information and related interpretations may end up as
inaccurate or incomplete as updated guidance and final interpretations are issued by the Treasury, IRS, and SBA. The information contained within this writing is provided for informational purposes only, and should not be construed as tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included in
Thank you for giving us the privilege to be your trusted professional services provider.
Wishing all a great 2021!!
FOCUSED ON YOUR SUCCESS,
Jeff Rummel, CPA, MBA
Director of Operations