Employee Retention Credit Expanded Under CAA 2021
The Consolidated Appropriations Act, 2021 (CAA 2021), signed into law by President Trump on 12/27/20, includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) which extends and expands upon the Employee Retention Credit (ERC) provided by the CARES Act. Well, that’s a mouthful! But whereas most of the COVID-19 related payroll tax provisions have yielded cash flow enhancing mechanisms that were just timing differences (i.e. no actual reduction in taxes due), there’s some real money on the table with the newly modified, expanded, and extended Employee Retention Credit.
INTERACTION WITH PPP LOANS
| Previously under the CARES Act | New law under TCDTRA |
| PPP loan recipients were not eligible to claim the ERC | PPP loan recipients are now eligible to claim the ERC |
PPP Loan Forgiven? No Double Benefit
| PPP Loan Forgiven,or Partially Forgiven? | PPP Loan Not Forgiven? |
| Wages that were paid with forgiven PPP loans cannot be included in “payroll costs” used in calculating the ERC. | Wages that were not paid with forgiven PPP loans can be included in “payroll costs” used in calculating the ERC. |
The aforementioned amendments are effective retroactively as though they had be included in the CARES Act as originally enacted.
Where to Claim the Retroactive ERC?
| Payroll Tax Reporting by PPP Borrowers under CARES Act | Payroll Tax Reporting by PPP Borrowers under TCDTRA |
| PPP borrowers were ineligible to claim the ERC on any 2020 quarters’ payroll tax return. | PPP borrowers that are now eligible should claim Q4 and retroactive ERCs in the calendar quarter in which TCDTRA was passed (i.e. Q4 2020) |
Example: ABC Company was the recipient of a PPP loan in May 2020. Under the CARES Act, ABC Company would have been eligible to claim the ERC on it’s Q2 and Q3 payroll tax returns were it not for it’s PPP loan. TCDTRA allows ABC Company to retroactively calculation it’s eligible wages, and thereby claim the ERC, on eligible wagers that were paid after 3/12/20 (the CARES Act start date) through 12/31/20, on it’s Q4 2020 payroll tax return, albeit excluding wages that were paid out of the proceeds of forgiven PPP debt.
EXCLUSION OF WAGES USED IN THE CALCULATION OF OTHER CREDITS
Wages that a business used in calculating the ERC may not also be used in the calculation of these other tax credits:
| Previously under the CARES Act | New law under TCDTRA |
| Employer Credit for Paid Family and Medical Leave | Employer Credit for Paid Family and Medical Leave |
| Work Opportunity Credit | Work Opportunity Credit |
| Credit for Increasing Research Activities | |
| Indian Employment Credit | |
| Employer Wage Credit for Employees who are Active Duty Members of the Uniformed Services | |
| Empowerment Zone Employment Credit |
EXTENSION AND EXPANSION OF THE ERC
| Previously under the CARES Act | New law under TCDTRA |
| Credit available to wages paid 3/12/20 – 12/31/20 | Credit available to wages paid 3/12/20 – 6/30/21 |
| Credit rate is 50% of qualifying wages paid 3/12/20 – 12/31/20 | Credit rate increases to 70% of qualifying wages paid starting 1/1/21 |
| Maximum qualifying wages per employee is $10,000 annually. | Maximum qualifying wages per employee is $10,000 per quarter starting 1/1/21 |
EXPANSION OF THE DEFINITION OF “ELIGIBLE EMPLOYERS”
Under the CARES Act, an “eligible employer” was one that operated a trade or business during 2020, and with respect to any calendar quarter:
- was required to fully/partially suspend their operations due to governmental orders, or
- had a “significant decline” in gross receipts for the calendar quarter.
“Significant Decline” Defined
| Previously under the CARES Act | New law under TCDTRA (quarters beginning 1/1/21) |
| >50% decline in gross receipts for the calendar quarter compared to the corresponding 2019 calendar quarter. | >20% decline in gross receipts for the calendar quarter compared to the corresponding 2019 calendar quarter. |
| Continuing until the calendar quarter following a quarter during which gross receipts are greater than 80% compared to the corresponding 2019 calendar quarter. | Upon election by the employer, for the immediately preceding calendar quarter, gross receipts are less than 80% of the gross receipts of the corresponding calendar quarter in calendar 2019. |
Note: If the business was not in operation at the beginning of a calendar quarter in 2019, the business may elect to use the comparable 2020 quarter.
Note: Although TCDTRA made the definition of “significant decline” in gross receipts easier to qualify for, no changes were made to the eligibility qualifier that business operations were fully/partialy suspended due to governmental orders.
“Small Employer” Definition Expanded
| Previously under the CARES Act | New law under TCDTRA |
| In calculating the credit: employers with an average of >100 full-time employees may only count wages paid to employees who are not actually working. | In calculating the credit: employers with <=500 employees may count all wages paid to employees (i.e. not just wages paid to employees who are not working). |
| In calculating the credit: employers with <=100 full-time employees count all wages paid (i.e. inclusive of wages paid to employees who are still working). |
ADVANCE PAYMENTS
| Previously under the CARES Act | New law under TCDTRA |
| Only employers with an average number of full-time employees (30 hours) of <=500 during 2019 may elect to receive an advance payment of the credit in any quarter. | |
| The amount of advance payment cannot exceed 70% of the average quarterly wages paid by the employer in calendar-year 2019. | |
| Seasonal employees can elect to pay 70% of the wages for the calendar quarter in 2019 which corresponds to the calendar quarter to which the election relates. | |
| Employers not in existence in 2019 may substitute 2020 wages for 2019. |
Note: Advance Payments are claimed on IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
(This is Blog Post #969)