Business owners who received the Paycheck Protection Program (PPP) loans under the CARES Act were ineligible for the employee retention credit (ERC), one of the COVID-19 relief provisions included in the original CARES Act. Both are wage-based, and lawmakers limited businesses to one or the other. The second-largest stimulus legislation package approved by Congress in late December makes it possible for employers to benefit from both programs—with some limitations. The new law also enhances several other aspects of the ERC.
The ERC encourages employers to keep employees on payroll during the COVID-19 crisis and its subsequent economic downturn. Previously, the fully refundable credit was equivalent to 50% of qualified wages, up to $10,000 of wages per employee, for a maximum credit of $5,000 per employee. Once the PPP became effective, employers had to choose between the PPP loan and the ERC. As a result, many PPP borrowers had to forego the tax credit. The ERC was based on qualified wages paid between March 13, 2020 and December 21, 2020.
Changes Boost Benefits For Employers
The new stimulus package extends the ERC to cover qualified wages through June 30, 2021. As of January 1, 2021, the credit increased from 50% to 70% of qualified wages, and it covers healthcare costs. The cap has been increased from $5,000 to $7,000 for the first two quarters of 2021, for a maximum credit of $14,000. Employers that had to fully or partially suspend operations due to a COVID-19 governmental order or had gross receipts less than 80% for the same quarter in 2019, are eligible.
Under the CARES Act, the ERC was not available for wages paid to an employee performing services for a company with more than 100 employees. Now, the threshold has been raised to 500 employees for the first two quarters of 2021. For businesses with affiliated companies, the 500-employee threshold is based on sharing more than 50% common ownership.
New PPP Loan Eligibility
Of great relief to many employers is that businesses receiving PPP loans are no longer ineligible for the ERC, but a credit cannot be claimed for the same wages paid by proceeds of a forgiven PPP loan. The change is retroactive to the effective date under the CARES Act.
Employers may catch up on previously unclaimed ERC by claiming the credit on the fourth-quarter Form 941, required to file with the IRS by January 31, 2021. It is expected for the IRS to issue clarifying guidance and updated 941 forms and instructions early in January. There is also the option of eligible employers filing amended 941s for affected calendar quarters of 2020.
The computation of the refundable payroll tax credit is adjusted for calendar quarters beginning after December 31, 2020, so that:
- It applies to per-employee eligible wages of $10,000 per quarter rather than $10,000 per year and can result in a $7,000 per quarter credit rather than a $5,000 per year credit.
- A substantial reduction of gross income is now defined as a 20% reduction and not a 50% reduction.
- New employers that were not in existence for all or part of the 2019 year are permitted to receive the credit.
- An employer can use prior-quarter gross receipts in determining eligibility based on new safe harbor.
Goldin Peiser & Peiser will continue to monitor all matters related to the new stimulus bill, especially concerning small business lending and PPP loans. Our CARE team can help ensure you receive the maximum amount of loan forgiveness by complying with program requirements.
Please visit our PPP Loan Forgiveness Consulting Services website page to learn more. If you need help with your PPP loan applications or have questions regarding loan forgiveness, email us at CARETEAM@GPPcpa.com or call Ann Bond at 972-818-5399.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.