The recent federal stimulus legislation (Consolidated Appropriations Act, 2021) made several important modifications to COVID-19 relief programs instituted last spring, including a significant extension and expansion of the ERC.
For instance, the Act extends the credit (originally set to end on January 1, 2021) to apply to qualified wages paid to employees after December 31, 2020, and before July 1, 2021. The Act also amends the credit to be equal to 70% (increased from 50%) of qualified wages paid to employees over this period. In addition, the limit on per-employee creditable wages has been increased from $10,000 for the year to $10,000 per quarter. This means the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee, per calendar quarter, or $14,000 total in 2021.
For 2021, the Act also reduces the requisite year-over-year decline in gross receipts from 50% to 20%, and employers may now take advantage of a special rule that permits calculating gross receipts based on the prior calendar quarter. In addition, the “large” employer exclusion, which limits which wage payments qualify for credit, has been increased from 100 to 500 employees.
The Act also makes several changes to the ERC that are retroactive to the effective date of the CARES Act, most significantly affecting employers who receive or received a PPP loan. While businesses that received a PPP loan were previously disqualified from using the ERC altogether, employers now qualify to take advantage of the credit for wages not paid with forgiven PPP loan proceeds.
Business Takeaway: Do consider whether the ERC, as revised, could benefit your business. In addition, it is important to monitor developments as we await additional guidance on various open questions. For instance, the IRS has not yet issued guidance on how eligible PPP borrowers can claim ERC credits for already made 2020 payroll tax filings.