On December 27, 2020, President Trump signed into law a stimulus package containing significant enhancements to the employee retention tax credit under the CARES Act. As a result, we believe that many of our clients will be eligible for the credit. Below is a summary of the changes to the employee retention tax credit. We advise you to compare your 2020 revenues to 2019 to determine if your business is eligible for the credit under these new provisions. If you need assistance, please feel free to check with us.
Updates to the Employee Retention Tax Credit:
- Period of Credit Availability – For qualified wages paid after March 12, 2020, and before July 1, 2021, extending availability of the credit through the first two quarters of 2021.
- Amount of Credit – Effective Jan. 1, 2021, the credit amount is increased to 70% of qualified wages paid during the first two quarters of 2021, capped at wages of $10,000 per employee.
- Maximum Credit Amount – Effective Jan. 1, 2021, the maximum credit is increased to $7,000 for each of the first two quarters of 2021 ($10,000 in qualified wages multiplied by 70% tax credit rate), so that the maximum credit for 2021 will be $14,000. This aggregate $14,000 per employee maximum credit for the first two quarters of 2021 is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.
- Eligibility Requirements for the Credit – Effective Jan. 1, 2021, business operations that are either fully or partially suspended by a COVID-19 lockdown order, or for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019. Many additional businesses will be eligible for this credit due to the lowering of the bar on reduction in gross receipts (from a 50% reduction in gross receipts to a 20% reduction) compared to the same quarter in 2019, before the pandemic.
- Credit Eligibility Whether an Employee is Working or Not – For the first two quarters of 2021, a company with 500 or fewer employees will be eligible for the credit, even if employees are working. Note that in calculating this 500-employee threshold, the employees of all affiliated companies sharing more than 50% common ownership are aggregated.
- PPP Loan Eligibility – A company that receives a PPP loan is no longer prohibited from claiming the employee retention tax credit; however, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven (no double dipping). This change is retroactive to the effective date under the original law (for wages paid after March 12, 2020). As a result, a company that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, should be able to file amended employment tax returns to claim the credit. Further, companies related to a PPP borrower that did not claim the credit because an affiliated company that shares common ownership received a PPP loan should also be able to file amended employment tax returns to claim the credit, if they were otherwise eligible to do so. Companies that did not claim the credit due to a PPP loan might be eligible to claim the credit for qualified wages paid after March 12, 2020.
- Advance Payments – The U.S. Treasury Department will draft guidance to allow an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. In other words, such companies may monetize the credit before the wages are paid. If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess to the government.
- Disallowance of Credit for Governmental Entities – Effective Jan. 1, 2021, an exception will allow the credit for state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (which includes organizations such as Fannie Mae, FDIC, Federal Home Loan Banks and Federal Credit Unions).
- Limitation on Increase in Pay Rate – This disallowance of the credit for pay rate increases is repealed, now allowing the credit for hazardous duty pay increases, among others.
We realize that this information may be daunting, but the updates to the employee retention credit will be beneficial to many businesses. Once again, we advise you to compare your 2020 revenues to those of 2019 to see if you are eligible for the credit under these new changes. If you would like us to look at your books to determine your eligibility, please contact our firm. You can also contact us with any questions about the new provisions to the Employee Retention Credit, or any other tax matters. We hope you have a safe and happy 2021!