More Employers Could Claim the Employee Retention Credit in 2021

New changes to the employee retention credit (ERC) have expanded its benefits to include more eligible employers and higher credit rates for an extended period. If your business did not qualify before, perhaps it’s time to reconsider.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted in December, made several changes to the employee retention tax credit provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including an increase to the credit rate and an extension through June 30, 2021. In March 2021, that period was further extended through December 31, 2021, thanks to the American Rescue Plan Act of 2021. Here is what we’ve learned.

ERC is very different in 2021

If your businesses did not claim the employee retention tax credit for last year, the credit can be retroactively applied to 2020. Several changes are aimed at helping businesses, and especially small businesses (those with less than 500 employees) obtain larger credits for qualified wages.

These are some of the most notable changes from the original guidance:

• The credit can now be used to offset employment taxes equal to 70% of qualified wages paid between January 1, 2021 and December 31, 2021 (an increase from 50% of qualified wages).
• The per-employee limit on qualified wages increased to $10,000 for each quarter. The maximum credit is $7,000 per employee, per quarter, for each quarter of 2021. This is a notable increase from $10,000 per employee for the full year.
• A previous 30-day wage limitation has been removed, which allows employers to claim the credit for bonus pay to essential workers.

The threshold for eligible employers has also been redefined. Originally, employers had to show that their operations were fully or partially suspended due to a government mandate, or that they suffered a decline greater than 50% in gross receipts. Now, any business with a decline in gross receipts of more than 20% compared to the same calendar quarter in 2019 can claim the employee retention credit. The decline needs to be shown by comparing a 2021 calendar quarter to the same quarter in 2019.

Can businesses who received PPP funds claim the credit?

The initial guidance has been updated to clarify that Paycheck Protection Program (PPP) loan borrowers can claim the employee retention credit in 2020 and 2021; however, businesses cannot claim the credit and PPP forgiveness with the same eligible expenses.

Per the IRS, the new law “allows employers who received PPP loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.” For example, if you used PPP funds to pay your employees and to cover lease payments for your business, you can only claim the employee retention credit if you did not apply for forgiveness on the full loan, only for the funds used to cover the lease payments.

The Small Business Administration (SBA) and/or the Internal Revenue Service (IRS) may require proof that the same wages were not used for both forgivable PPP expenses and the employee retention credit. While we await additional guidance on what documentation will be necessary to provide proof, speak with your advisors and keep accurate, up-to-date financial records to facilitate any future disclosures.

If you are among the business owners who made the difficult decision to keep paying your employees through unforeseen pandemic challenges, this tax credit may be helpful as you continue navigating your business’ recovery.

The employee retention tax credit is just one provision that could help keep businesses afloat, but other beneficial changes could be on the way under the new administration. If you need assistance to determine whether your business could be eligible for additional tax credits and incentives, contact me or another Kaufman Rossin tax professional.