The recently enacted “Consolidated Appropriations Act, 2021” (“CAA”) [1] was the latest effort by Congress to provide stimulus and relief to individuals, businesses, health care providers, and more impacted by the COVID-19 pandemic. The legislation offers nearly $1 trillion in relief and was packaged with a larger government spending bill. The mammoth bill was signed into law on December 27, 2020, exactly nine months to the day after Congress passed the “Coronavirus Aid, Relief, and Economic Stimulus Act” (“CARES Act”), which totaled $2.3 trillion in relief.
There are a number of provisions in this new legislation designed to assist struggling businesses. One of the significant opportunities in the CAA is an enhancement of the “Employee Retention Credit” (“ERC”), which was introduced in the CARES Act. The CAA made several changes to the ERC – most of which are beneficial for businesses and employers. This article will address many of the changes in the ERC and highlight how employers can realize these savings.
[1] While in Congress, the bill was referred to as the “Consolidated Appropriations Act, 2021” (“CAA”) but was signed into law as the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” or “Economic Aid Act” (PL 116-260).
Background
The ERC was designed to provide an incentive for employers impacted by the pandemic to retain their workforces. As with the “Paycheck Protection Program” (“PPP”) loan, also part of CARES, the focus of the ERC was to keep employees working. The ERC, however, was designed differently than the PPP, and instead of providing funds through a government loan, it offered payroll tax credits that could be realized immediately by employers if they met various requirements.
The ERC presented a number of hurdles for employers to navigate. Several key ERC features included:
- Eligible Employer. An employer was entitled to the ERC if they met one of two requirements: (1) they experienced more than a 50% reduction in gross receipts in 2020 in a calendar quarter compared with 2019; or (2) their business operations were fully or partially suspended by a government order imposing restrictions by curbing travel, commerce, or group meetings because of the pandemic. Provisions concerning the full or partial suspension of operations were not clearly spelled out in CARES, but the IRS offered several FAQs on situations when the ERC is or is not available.
- Employee Wages. The employer received a 50% credit on wages up to $10,000 per employee paid in 2020. Thus, a maximum credit of $5,000 per employee in 2020.
- Qualified Wages for ERC. A critical aspect of the ERC: the credit was only available for employees that the employer continued to pay for not working. Although, there was a special rule for small employers with less than 100 full-time employees that allowed the credit to be provided whether employees were working or not. The IRS also offered FAQs on how these qualified wages were determined for ERC purposes.
- ERC vs. PPP. As noted, the ERC and PPP loan were structured much differently but with a common goal of paying employees. However, the CARES legislation stipulated that an employer could not obtain a PPP loan and also receive an ERC. It was one or the other.
- ERC Mechanics. An employer did not need to wait until the end of the year to realize the ERC; rather they could receive this credit during the year on their payroll tax filings. This would offset the payroll tax deposits, and if the ERC exceeded other payroll tax deposits, this amount could be refunded. IRS Form 941, Form 941X, and Form 7200 were used to claim the ERC.
ERC Revisions and Expansions in the CAA
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The CAA made several favorable changes in the ERC that may apply beginning in 2021 or retroactively back to the enactment of CARES in March 2020. In some cases, employers may be able to realize some ERC savings in 2020 as well as benefit during 2021. It is therefore essential for employers to determine if the CAA change impacting them applies only for 2021 or back into 2020.
Here are several of the CAA provisions that apply beginning in 2021:
- The ERC is available for employers from January 1, 2021 through June 30, 2021.
- The rate of the ERC wage credit increases to 70% in 2021 (up from 50% in 2020).
- The wage limitation per employee changes to $10,000 per quarter in 2021, not $10,000 per year (as in 2020). Thus, the maximum per employee credit in 2021 rises to $14,000 – nearly triple the $5,000 per employee cap in 2020.
- The ERC eligibility is enhanced by reducing the year-over-year quarterly drop in gross receipts requirement to 20% (from 50%).
- It significantly increases the small employer exception to employers with less than 500 employees (up from 100 employees). These employers will be entitled to higher ERC credits in 2021 for paying wages to all employees regardless of whether they are working or not.
Consideration for employers. These new CAA changes present sizable opportunities for employers to take advantage of the ERC. The higher 70% and increase in qualifying wages jumps the maximum credit per employee up to $14,000 and offers more benefits to employers. Further, the drop in gross receipts factor of 20%, down from 50% in CARES, permits more employers to be in a position to claim the ERC.
CAA changes that apply retroactively in 2020:
- CAA specifies that employers obtaining PPP loans from the CARES Act would also be eligible for the ERC. This was not permitted before the CAA. Please note, an employer cannot claim the ERC on the same wages they used in their payroll forgiveness application. As a result, an employer might seek to specify non-payroll costs (up to the 40% threshold) as part of their PPP loan forgiveness application. This may permit more qualifying wages for the ERC.
- The new law indicates that health insurance coverage provided to an employee would be treated as employee wages for ERC purposes, even if no other wages were paid to the employee.
Consideration for Employers. Employers receiving a PPP loan can go back and review their loan forgiveness, while also seeking to revisit 2020 wages and possibly obtain an ERC by filing amended payroll forms for 2020.
The CAA enhancements to the ERC make this a tax incentive nearly every employer should evaluate. Please contact your Sikich advisor with any questions or for further details.
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Glen Birnbaum
Glen Birnbaum, CPA, ABV, ASA, CVA, CM&AA, is a partner with over 20 years of experience valuing closely held businesses. Glen provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses.
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
