The Consolidated Appropriations Act of 2021 (“CAA”) significantly enhanced the Employee Retention Credit (“ERC”) originally introduced by the CARES Act, most notably by retroactively allowing employers to claim the ERC for 2020 even if they took a PPP loan. Under the CARES Act, you could take a PPP loan or claim the ERC, but not both. Eligibility for the ERC is based on either experiencing a significant decline in gross receipts (further explained below), or by having operations either fully or partially suspended due to a government order related to COVID-19.
The CAA also extended the eligibility period for the ERC through the first two quarters of 2021 and made other major enhancements to the credit effective for 2021. These enhancements include the following:
- lowering the threshold for meeting the “eligible employer” standard under the gross receipts test (requiring only a 20% decline in gross receipts compared to a 50% decline required for the 2020 ERC);
- raising the credit rate to 70% (from 50% in 2020);
- raising the maximum qualified wages to $10,000 per quarter (from $10,000 aggregate for all of 2020); and
- raising the “small employer” limit to 500 full-time employees (compared to 100 full-time employees for the 2020 ERC)—a small employer is allowed to claim all wages paid during the eligibility period; while large employers can only claim the ERC for wages paid to employees not providing services.
As a result, the maximum ERC per employee for 2021 is $14,000, compared to $5,000 for the 2020 ERC.
While these ERC enhancements are certainly welcome by employers, especially those struggling to keep afloat during the pandemic, key questions remain on how to apply the new rules. First and foremost, the interplay between the ERC and PPP raises many issues. While the CAA allows for both PPP and ERC, it specifically disallows the ERC for any wages used for PPP loan forgiveness. Many PPP borrowers included more wages on their PPP forgiveness applications than would have been necessary to maximize the forgiveness amounts. Will the IRS allow employers to claim the ERC on any wages above what would have been needed to maximize PPP loan forgiveness? Further, many employers only included wages on their PPP forgiveness applications even though additional expenses for rent, utilities, and interest could have been included. Now that the ERC is available retroactively for 2020, will the IRS allow employers to treat these other types of expenses as if they were in their PPP forgiveness formula to free up more wages for the ERC?
Additional questions remain around the mechanics for claiming the ERC. Will the IRS allow for an employer to claim a “catch up” 2020 ERC on their Q1 2021 941? Or a single amended Q4 941 for 2020? How will the provision for allowing for an advance payment of the 2021 ERC be administered?
Finally, employers are still struggling with the application of some of the key subjective criteria for claiming the ERC for a “partial suspension of operations”. Employers would welcome additional guidance and examples from the IRS to clarify circumstances that constitute a partial suspension of operations for ERC purposes.
Stay tuned for guidance around these and other questions related to the expanded ERC.