The new Consolidated Appropriations Act, 2021 (“the Act”) signed on December 27, 2020 has brought welcomed changes for businesses seeking continued financial support through COVID-19. With expanded eligibility for the employee retention tax credit (ERC) and a second round of Paycheck Protection Program (PPP) loans available, businesses should consider the following key updates as they continue to face challenges powered by the pandemic.
Expanded Provisions of the Employee Retention Tax Credit
The ERC provides eligible businesses with a refundable credit against employment taxes on qualified wages paid to employees they retained during the pandemic. The Act made significant changes to the availability of the ERC. One of the most favored of these changes now allows employers to both claim the ERC and receive a PPP loan, as long as the “qualified wages” used to determine the ERC are not also being used as authorized costs for forgiveness on the PPP loans. Originally, as unveiled in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in March 2020, the ERC was only applicable to businesses that did not receive a PPP loan. Employers, even those who received first-round PPP loans, can now claim the tax credit retroactively to March 13, 2020. The Act also extended ERC availability. The credit was initially set to expire at the end of last year, but the Act extended the credit through June 30, 2021.
Not all businesses with employees are eligible for the credit and the requirements for being an eligible employer differ depending on the tax year. For both 2020 and 2021, a reduction in gross receipts is a component of eligibility. However, for 2020 only, businesses may also meet the eligibility requirements for the credit if they were subject to a mandated shutdown by government at any time during the year.
Gross Receipts Test Eased in 2021
As we saw in the CARES Act, to be eligible for the ERC based on the gross receipts test, a business needed to report more than a 50% decline in gross receipts in 2020 compared to the corresponding quarter in 2019. This changed for 2021 when the Act lowered the gross receipts eligibility threshold from 50% to 20%. Businesses now only have to show a 20% decline in gross receipts as compared to the same quarter in 2019 to satisfy eligibility.
Qualified Wages Limit Increased
The 2020 ERC provided a refundable credit amount of up to 50% of qualified wages for a maximum credit of $5,000 for each full-time employee for those kept on payroll between March 13, 2020 and December 31, 2020. The Act raised this wage threshold, granting a credit of up to 70% of qualified wages for a maximum credit of $14,000 for each employee retained between January 1, 2021 and June 30, 2021.
Small Employer vs. Large Employer Threshold Change
Another significant piece of the Act is the revised definition of a large employer. The Act raised the large employer threshold from 100 full-time equivalent (FTE) employees to 500 FTE employees. This threshold is important because large employers must calculate their credit based only on the wages of employees who are “not providing services,” while small employers can calculate their credit based on the wages of all employees. By raising this threshold, more businesses qualify as small employers and can expand their wage based off of which the credit is calculated.
Eligibility for Second Draw PPP Loans
If your business continues to be impacted by COVID-19 and faced with financial constraints, the Small Business Administration is now accepting Second Draw PPP Loan applications through March 31, 2021. A borrower is generally eligible for a Second Draw PPP Loan if the business:
- Employs no more than 300 employees (reduced from 500) or meets an alternative size standard;
- Can show at least a 25% reduction in gross receipts in 2021 during comparative quarters in 2019;
- Has used or will use all of their First Draw PPP Loan funds.
While there are still several areas in which the IRS needs to provide further clarification, this newly revised legislation has broadened accessibility to both the ERC and the PPP and is an appealing additional benefit to many businesses in need of additional relief.
Every business is experiencing COVID-19-related setbacks, but every business is also unique and requires its own set of strategies to address specific circumstances. We want to hear your story and help you implement tax opportunities that will best position your business for a bright future. Contact us if you have any questions or would like to further discuss your situation. Please reach out for assistance or with questions.
This article was featured in Crain's Cleveland Business on March 6, 2021.