Last week, we discussed some of the changes to COVID-19 relief under the newly enacted ~$900 billion legislation. This week, we take a deeper dive into the specifics of the changes to the Employee Retention Credit (ERC) as modified via Internal Revenue Code Sections 206 and 207 of the new law.
As initially instituted in the CARES Act in March of 2020, the ERC was a mutually exclusive alternative to a Paycheck Protection Program (PPP) loan – if a business applied for a PPP loan, it could not also apply for an ERC, and vice versa.
Section 206 of the new law specifically rescinds that mutual exclusivity, enabling a business to take out a PPP loan and remain eligible for an ERC, so long as the same eligible payroll-related costs are not used to calculate eligibility for both the PPP loan and the ERC. This is true retroactively for 2020, as well as for the first two quarters of 2021.
However, the rules governing the ERC vary significantly from 2020 to 2021 – for 2020, the major change under the new law is the eligibility of PPP borrowers to apply for an ERC under Section 206.
2020: A business was/is eligible for an ERC for 2020 if, for any quarter, 1) that business was shut down or partially suspended by governmental regulation or edict, or 2) the business experienced a drop in revenue of 50% or more versus the same quarter in 2019. Once eligible, the business remained ERC-eligible until the end of any 2020 quarter in which revenues returned to 80% or more of the revenues from the same quarter in 2019.
2021: Under Section 207(a)(1) of the new law, the ERC is extended through June 30, 2021, from its original end date of December 31, 2020. A business is eligible for a 2021 ERC if, for either the first or second quarter, gross revenues are less than 80% compared with the same quarter in 2019, rather than the same quarter of 2020.
If the business had not begun operations at the start of the comparable 2019 quarter, the corresponding 2020 quarter revenues may be substituted. To determine eligibility for an ERC for the first quarter of 2021, 4th quarter revenues for 2020 versus 2019 may be used.
2020: A business which qualified for an ERC could claim a tax credit equal to 50% of the first $10,000 in eligible compensation (expanded retroactively in the new law to include health-insurance costs paid by an employer) paid to any employee during the year, providing the business had 100 or fewer full-time equivalent (FTE) employees. For such companies, every fully-eligible employee with over $10,000 in annual wages would enable the business to claim a tax credit up to $5,000.
If, however, a business had over 100 FTE employees, only those employees who were paid but not actually working were eligible to be claimed in an ERC.
For example, a business owned a chain of restaurants offering sit-down dining and had over 100 FTE employees in 2019. Due to COVID-19, the company was barred from providing dining on-site and could only provide take-out. The wages of wait staff who were not working but were paid are eligible to claim an ERC against, but the salaries of the working kitchen staff are not.
2021: Under Section 207(b) of the new law, an eligible business can claim a 2021 ERC equal to 70% (up from 50% in 2020) of the first $10,000 of qualified wages paid to any employee per quarter, rather than on an annual basis. This means that for a business showing gross revenue drops of 20% or more for both the first and second quarters of 2021 as compared with 2019, an employee whose wages generated an ERC eligibility of $5,000 in total for 2020 could potentially generate eligibility for $14,000 in ERC for 2021.
Section 207(e) increases the number of employees a business may have before the change in eligible FTE employees (i.e., only those paid not to provide services) kicks in from 100 to 500, meaning that the hypothetical restaurant chain postulated above would, providing it has fewer than 500 employees in total, be able to claim an ERC for their working kitchen staff as well as paid but non-working wait staff.
2020: Eligible wages per qualified employee were capped by Section 2301(c)(3)(b) at what the employee’s wages would have been during the 30-day period prior to the eligible quarter. Simply put, this was instituted to preclude an employer from paying higher wages temporarily, or bonuses, to gain a greater ERC.
2021: Section 207(e)(2) strikes Section 2301(c)(3)(b) entirely, meaning that employers can pay bonuses or increase wages and remain eligible for ERC based on those increased figures.
Further, Section 207(g) provides, for 2021, that a business eligible for an ERC for a given quarter can receive the ERC in advance, rather than claiming the credit by reducing payroll tax deposits. The credit claimed can be up to 70% of the average wages paid for the same quarter in 2019.
We will monitor the guidance which will be forthcoming from the IRS, and, of course, report back.
If you have questions on the new rules governing the ERC and how it might impact your business, please click here to email me directly.
Until next Wednesday –