The Consolidated Appropriations Act (CAA) changed who would qualify for the Employee Retention Credits (ERC).  The new act eliminated the restriction for those that participated in the PPP Loans.  Therefore, the taxpayer now has other avenues to review prior to filing for their PPP loan forgiveness.

The ERC allows a company to take a credit against their federal payroll tax obligations for payrolls paid between March 12, 2020 and December 31, 2020.  The CAA Act expands this time period through June 30, 2021.

Let’s discuss 2020 first:

In order to qualify for the credit, the company must meet one of the following qualifications:

1. Governmental order Shutdown either full or partial OR
2. Gross receipts for the quarter in 2020 compared to 2019 decreased 50%

The governmental shutdown in full means that your doors were closed, and your employees did not have the ability to telework – basically no one could work.  The governmental shutdown in partial means that part of your employees did not have the ability to work.  A great example is a restaurant that could no longer have in-house dining but could still do carry-out.  Therefore, the bartenders and waiters could no longer perform their duties, but the kitchen staff could still work.

The aggregation rules (companies that have more than 50% common ownership) apply to both the number of employees and gross receipts in determining if you are over employee limits or the gross receipts are reduced.

Wages are gross wages subject to social security taxes and allocable group health care benefits; includes HDHPs, HRAs, FSAs, does not include HSAs or QSEHRAs. FTE is an employee who in 2019 averaged at least 30 hours of service per week or 130 hours of service per month.  The average number of FTE’s is determined by taking number of FTE’s in each calendar month of 2019.

So, if you meet one of the two qualifications, you then look at what your average employees were for 2019.

1. Greater than 100 employees
2. Less than 100 employees

Greater than 100 employees:

If you have more than 100 employees, only the wages paid to employees for them not to work is eligible.  So, in the examples above for the shutdown, only those that could not perform their duties and did not perform their duties qualify.  Also, the average pay for the 30 days prior to the credit period is the maximum available for the credit.  This avoids a company increasing a person’s pay to increase the credit.

Less than 100 employees:

If you have less than 100 employees, all wages paid to employees qualify whether they were performing their duties or not.

Now, how much of the wages are eligible?  Understand that wages can only be used once for the three credit options available – COVID-19 Sick/Family Leave Credits (FFCRA Credit), PPP Loan Forgiveness or the ERC.  We are still waiting for guidance on whether we can pick and choose the order of how this applies.

The first $10,000 of wages and healthcare costs paid to each employee is eligible during the 2020 year.  The $10,000 can expand over each quarter that you qualify for, but stops once you reach the $10,000 of wages paid during the year.  Originally, only the normal wages were allowed, however the CAA now allows bonuses and hazard pay. An additional expansion of CAA also includes health insurance for employees who did not have actual wages.

The credit is 50% of the wages paid, maxing out at $5,000 per employee.

How long am I eligible for the ERC?

The company is eligible if they meet one of the two qualifications.  If the company qualifies using the gross receipts, then the company continues to qualify until the quarter after their receipts exceed the 80% level.  Basically, if you qualify in one quarter, you will continue to qualify for the next quarter, but would no longer qualify for the third quarter once you meet the 80% level.

Example:  Company has received in Q1, Q2, Q3 and Q4 for 2019, 2020 and 2021 as follows:

The company qualifies for Q2 because the receipts have dropped below the 50% level so they will qualify for Q3 as well.  Since the company reached the 80% level in Q3 they are no longer eligible for Q4.

If you are eligible and did not take the credit, we can assist in amending your 941 for you to capture the credit.

NOW 2021 and CAA changed the following:

1. The Gross Receipts decline requirement changed from 50% to 20%. Therefore, if your receipts for Q1 or Q2 of 2021 drop by 20% compared to the same quarters in 2019, then you qualify under the receipts’ qualification.
2. The company size requirement limit increased from 100 to 500 employees. This allows businesses with under 500 employees to receive the same benefit as businesses with under 100 did in 2020.  See previous note above for “Less than 100 employees” but using 500 employee maximum for 2021. Affiliated Companies sharing more than 50% of common ownership are aggregated together.
3. The $10,000 wage limitation expanded from the year to the quarter. Therefore, the business can use $10,000 per employee for each quarter for both Q1 & Q2 in 2021, if they qualify.
4. The Credit increased from 50% to 70% of wages. The 2020 max credit per employee was $5000. For 2021, the max is $7,000 per employee per quarter for a potential $14,000 per employee.
5. Also, if the company’s gross receipts for Q4 2020 compared to Q4 2019 has a 20% reduction you automatically qualify for Q1 2021 – It is not clear whether the company can use this rule to qualify for the ERC in the first two quarters of 2021 based solely on a decline in gross receipts during the first quarter of 2021. There should be additional IRS guidance coming.
6. For those with less than 500 employees the company can request an advance payment equal to 70% of your average payroll for the same quarter of 2019.  Understand that this is an advance payment that would be reconciled and if not used would have to be repaid.
7. Governmental agencies such as state or local run colleges, universities, organizations providing medical or hospital care and certain organizations chartered by Congress (Fannie Mae, FDIC, Federal Home Loan Banks and Federal Credit Unions) are now eligible, but only for 2021.
8. Gross receipts have been defined as gross receipts of the taxable year including total sales, net of returns and allowances, and all amounts received for services. In addition, gross receipts include any income from investments and from incidental or outside sources.  They have the same meaning as Section 448 (c) of the IRS Code.
   1. Sales less returns and allowance plus investment income (interest, dividends, rents royalties and annuities) less adjust basis in assets sold
   2. Nonprofit – revenue plus investments (interest, dividends, rents, royalties, annuities, contributions, gifts, grant, and member dues) for tax exempt organizations must account for all gross receipts within IRC Section 6033 and not only gross receipts from unrelated trade or business activities

Other planning opportunities

1. If PPP loan forgiveness has already been applied – Eligible for ERC can use the health insurance benefits paid. It has been recommended to the IRS and treasury that if you had excess wages on your PPP loan forgiveness that the excess could be used for   However, we are awaiting guidance on this.  It is still unknown whether the IRS will allow you to reallocate nonpayroll expenses that could have been used for PPP forgiveness after the fact, since the law changed after you had already gone through forgiveness.
2. If PPP loan forgiveness has NOT been applied for and you would be eligible for this credit – then make sure you have $10,000 wages and health insurance per employee, not used on the PPP forgiveness application if there will be excess. You could use less weeks for forgiveness and use nonpayroll costs for up to 40% of the PPP loan amount.
3. If employees were furloughed and health insurance benefits were paid, they can be used for the ERC.
4. Ordering of your selection
   1. PPP Loan
   2. FFCRA Leave Credits
   3. Retention Credits

How to claim the credit:

1. Reduce your 941 deposit – this is the fastest way to collect
2. File Form 7200 – only for refunds >$25 otherwise it will come through on Form 941.
3. File for refund on Form 941.
4. The deadline for filing an amendment of the form 941 is April 15, 2024.
5. PPP borrowers can include the missed credits on the fourth quarter 2020 return rather than amending Q2 and Q3 returns. These must be filed by January 31, 2021.