Passed in March of 2020, the CARES Act provided relief for employers whose trade or business operations were fully or partially suspended due to impacts related to COVID-19 governmental orders or whose gross receipts for a calendar quarter beginning after December 31, 2019, are less than 50% of the gross receipts in the same calendar quarter for the prior year (2019). Eligible employers could claim a credit against employment taxes for up to 50% of wages paid to employees after March 12, 2020, and before January 1, 2021. The amount of relief was capped at $10,000 of wages per employee for all calendar quarters. If the employer had more than 100 employees, they were only eligible for the credit on wages paid to employees who were not providing services to the business due to a shutdown order. All other employers were eligible for the credit as described above. (see related post) Additionally, the CARES act did not permit employers to utilize benefits from both the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).
On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021, which enhanced and expanded the employee retention credit. (see related post) Under the new law, the ERC opportunity was extended to include the time period through June 30, 2021, in addition to a plethora of other taxpayer-friendly changes:
- For wages paid between January 1, 2021, and June 30, 2021, the credit is set at 70% of applicable wages (not 50%). The limitation for credits on these wages is now set at $10,000 per quarter, per employee (the old rule was $10,000 per year, per employee).
- The Safe Harbor gross receipts test shifted from a 50% decrease to a 20% decrease, subject to various timing constraints.
- The applicable employee threshold increased from 100 to 500 employees.
- The retention credit is now available retroactively for employers who also received a PPP loan, so long as the wages used for loan forgiveness are not used in the computation of the retention credit.
Of particular importance to most employers in the short-term is re-evaluating whether there is an opportunity to amend their Forms 941 to take advantage of the employee retention credit in 2020. If your business was fully or partially shut down or impacted by governmental orders and you previously utilized the PPP loan, you potentially have an opportunity to obtain refundable tax credits by taking advantage of the new ERC rules.
Businesses in the restaurant, hospitality and similar service industries continue to operate at reduced capacity and likely exhausted their PPP loans at some point in 2020. While there is the potential to obtain a second draw PPP loan, there is also an avenue to obtain tax credits for 2020 (and potentially 2021) for certain businesses as a result of these retroactive and enhanced ERC changes.
If you would like more information on the employee retention credit or other matters related to the latest COVID-relief package, please contact Bob Grossman, Don Johnston or Mike Weber at 412-338-9300.