Employee Retention Credit Enhancements & Interplay with PPP Loans

The Employee Retention Credit (ERC) is a payroll tax credit established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became effective Mar. 27, 2020. The ERC applies to eligible employers:

1. That continued to pay qualified wages to employees during a period in which operations were fully or partially suspended as a result of a government order related to the COVID-19 pandemic or
2. Who’s business experienced a more than 50 percent decline in gross receipts during a quarter in 2020.

Initially, the ERC was equal to 50 percent of qualified wages with a maximum credit of $5,000 per employee. Additionally, the ERC was not available for those who were recipients of loans under the Paycheck Protection Program (PPP).

The Consolidated Appropriations Act (CAA), enacted on Dec. 27, 2020, enhanced the Employee Retention Credit program for both 2020 and 2021.  The enhanced ERC has several retroactive and prospective changes, including availability of the program for PPP loan recipients, loosened guidelines for eligibility and a more substantial maximum credit amount for 2021.

The CAA includes certain retroactive enhancements to the ERC for eligible employers regarding interaction with PPP loan recipients. The new legislation enabled PPP loan recipients to also claim the ERC under certain criteria:

• PPP loan recipients must still qualify as an eligible employer for the ERC.
• The wages for which the ERC is claimed cannot be used in the PPP loan forgiveness computation.

In many instances PPP loan recipients could have adequate wages to claim the ERC and obtain full PPP loan forgiveness if their headcount and payroll are consistent in 2019 versus 2020. If an employer has submitted a PPP loan forgiveness application that has been approved by the Small Business Administration (SBA), the employer may still apply for a credit on “non-forgiveness” wages, pending further guidance from the SBA and Internal Revenue Service. If an employer has not yet received confirmation of PPP loan forgiveness, they may request to pause the application process with the lender in order to evaluate ERC eligibility and the interaction of PPP and ERC wages.

The ERC has been extended through Jul. 1, 2021, with a modification to employer eligibility requirements for 2021. An employer can still qualify based on the government order criteria, but the gross receipts test has been modified to 80 percent of gross receipts for a quarter in 2021 compared to the same quarter in 2019. An employer can also elect to compare 4^th quarter 2020 to 4^th quarter 2019 to determine 1^st quarter 2021 eligibility. Employers may claim up to $10,000 in qualified wages per employee per quarter, with a credit amount equal to 70 percent of qualified wages for a $7,000 maximum credit per employee per quarter in 2021.

The CAA also changed the definition of a large employer for 2021 to have more than 500 full-time employees for the purpose of determining qualified wages. Eligible employers below the threshold may claim all wages paid as qualified wages.