The most recent stimulus bill, known formally as the Consolidated Appropriations Act, 2021 (“the Act”) included changes to the Employee Retention Credit (“ERC”) which is a program that was included in the CARES Act back in March 2020 and can be taken as a credit against a company’s payroll taxes due on their 941 filing. Originally, you could not have a Paycheck Protection Program (“PPP”) loan and utilize the ERC, and in most cases the PPP loan was the better way to go so there wasn’t much attention paid to the ERC. That will likely change, especially with the changes to the ERC available in 2021, which we’ll refer to as ERC 2021 to help differentiate it from the original ERC, which we’ll refer to as ERC 2020. ERC 2020 is the version that is available until December 31, 2020, and that any retroactive changes from the Act apply to.
The first item to mention is that the Act allows a PPP loan borrower to also utilize the ERC, so now it isn’t just one or the other, but you can use both. This applies to ERC 2021 and is the major retroactive change for ERC 2020. Other than this change, ERC 2020 is the same for the most part, and any changes in the criteria to qualify or how the credit is calculated apply only to ERC 2021. The qualification criteria and calculation of ERC 2020 did not change (but are listed below for comparison purposes and as a refresher in case you do qualify now that having a PPP loan doesn’t exclude you from utilizing the credit).
Here are the key items for both credits.
- Qualification Criteria
- ERC 2020 – more than 50% decline in gross receipts from the comparative quarter in 2019. So Q2 2020 is compared to Q2 2019. It then stays in effect until you have a quarter that is over 80% of the comparative quarter. So, if you qualified in Q2 (down over 50%) and then Q3 2020 is down 25% from Q3 2019, you still qualify in Q3 and will in Q4 too. If Q3 is down 15% then you still qualify for the credit in Q3, but it ends there. Also, if your business was shut down because of a government order, then that also qualifies BUT only during the time the order was in effect, not the entire quarter if the shut down did not last that long.
- ERC 2021 – more than 20% decline in gross receipts from the comparative quarter in 2019. So Q1 2021 is compared to Q1 2019 and Q2 2021 to Q2 2019. For this version, you can also choose to use the immediately preceding quarter, so for this credit you could compare Q4 2020 to Q4 2019 if you couldn’t qualify comparing Q1 2021 to Q1 2019. This would also mean you’d know you could take the credit instead of waiting until the end of Q1 2021 to see if you qualify. The shutdown rules still apply. Note: if your business did not exist at the beginning of the same quarter in 2019, you would compare the quarter of 2021 with the same quarter of 2020.
- Amount of the Credit
- ERC 2020 – if you qualify, limited to 50% of qualified wages up to a maximum of $10,000 in wages for ALL quarters. Essentially, a maximum of $5,000 per employee for all four quarters of 2020, not per quarter. So if I have an employee that earns $10,000 per quarter and I qualified for Q2, Q3, and Q4 of 2020 then my maximum credit is $5,000 on their $30,000 of eligible wages (keeping in mind the rules for wages used for PPP forgiveness discussed later in this article).
- ERC 2021 – if you qualify, limited to 70% of qualified wages up to a maximum of $10,000 in wages for EACH quarter. Essentially a maximum of $14,000 per employee for the first half of 2021 when this credit is available (it ends on June 30, 2021). So if I have an employee that makes $10,000 a quarter and I qualified for Q1 and Q2 of 2021, then my maximum credit is $14,000 on their $20,000 of eligible wages (again assuming these wages weren’t also used for PPP loan forgiveness, discussed below).
- Number of Employees
- ERC 2020 – if you had 100 employees or less, then this credit could be taken for qualified wages from employees that are working or not working, it didn’t matter. But, if you had more than 100 employees, then the credit only applied to employees that were being paid to not work.
- ERC 2021 – this is the same as ERC 2020 BUT the limit has been increased to 500 employees, so many more employers (during 2021 to be clear) will be able to utilize the credits for all employees, not just ones that are being paid to not work.
This next part is important for both versions of the credit. You cannot use the same wages for the ERC and for PPP loan forgiveness. This has different implications for ERC 2020 (which relates to a period that’s already passed) and ERC 2021 (which relates to upcoming quarters) and is discussed in the next two sections.
For ERC 2020, first you have to qualify for this to even matter, so if you didn’t meet the criteria above then there’s nothing to worry about if you already applied for PPP loan forgiveness and received it. If you do qualify for the retroactive ERC 2020 because you met the gross receipts decline or were shut down and were paying employees during the shutdown, then there’s the unique situation of which wages did you use for forgiveness. Say you applied for forgiveness and had a loan of $100,000 and took the straightforward approach and only submitted wages of $300,000 since they far exceeded your loan amount. Is that entire $300,000 excluded from the ERC? Likely it is not, only the $100,000 you needed to use for forgiveness would be excluded (this is assuming you had no penalties and the forgiveness was dollar for dollar with the submitted expenses). The next question is what time period does that $100,000 relate to, which is something that is likely best to contact us to discuss as there isn’t necessarily a correct answer right now without any type of guidance (assuming any guidance is issued at all). If you haven’t applied for forgiveness yet AND qualify based on the criteria, then this is a little easier to figure out before you apply.
For ERC 2021, if you apply for another PPP loan (“PPP2”) in this next round of PPP (which we discuss in this article if you want to know the criteria for this next round of PPP) then it becomes easier to start to keep track of what you used for the ERC in 2021 (if you qualify) so you know that you can’t use it for PPP Round 2’s loan forgiveness. However, you do have to keep in mind that you still have the criteria that 60% of the PPP funds need used on payroll, but if you’re using 24-weeks for your PPP2 covered period, this shouldn’t be an issue and you could maximize the ERC in 2021 and still get full forgiveness on the PPP2 loan. There are also more expenses that you can use in your forgiveness calculation, which can help make up the payroll you can’t use if you used it for the ERC 2021 credits (keeping in mind the 60% minimum).
This is just one part of the 5,500 plus page stimulus bill that recently became law. Unfortunately, it isn’t extremely straightforward, especially with what essentially amounts to two different credits (ERC 2020 and ERC 2021). It is an important part of the Act though as the ERC available in 2021 will be easier to qualify for and could result in some significant credits. And if you qualify for the ERC in 2020, keeping in mind the more difficult to meet criteria above, then you should start figuring out how to calculate the credit you’re entitled to, especially if you had a PPP loan, and claim it. If you need some help figuring out if you qualify or how to calculate this credit, contact us.