The recently passed Consolidated Appropriations Act, 2021 (CAA) gave new life to a popular tax credit that originated with the CARES Act last March. The Employee Retention Credit (ERC) as it originally existed ran through December 31, 2020. Additionally, those who received a PPP loan hit a roadblock, as PPP loan recipients were precluded from taking advantage of this credit. With the CAA, the ERC got new wings for 2021 but there’s also the opportunity for some important, retroactive 2020 tax planning as well. We’re all excited to put 2020 behind us but stick with us on this one – it’ll be worth going back to yesteryear to consider how this credit might benefit your business! We’ll also look forward to seeing how you can really benefit from this credit in 2021!

Going back to 2020, a significant restriction has been lifted. Those who received a PPP loan in 2020 are now eligible to receive the ERC for non-PPP wages paid from March 12, 2020 thru December 31, 2020! This is a big deal! If you were previously disqualified due to having received a PPP loan and you experienced one of two qualifying events (a government-mandated business shutdown or a 50% reduction in quarterly gross receipts compared to the same quarter in 2019), you are now eligible to receive a credit of 50% of the first $10,000 of each employee’s wages paid during the aforementioned timeframe – that is, a $5,000 max credit per employee. If you had 10 employees, this could turn into a $50,000 credit pretty easily. 20 employees? $100,000. You get the idea.

But what’s the catch? There’s always a catch. The only catch is that you can’t double-dip on the wages you paid with the PPP loan, since that’s fully forgivable money already. But if you were eligible for the credit in Q2 of 2020 and received a PPP loan at the same time, some of those wages paid could be eligible (particularly the wages paid before you received the PPP loan), as well as Q3 and Q4 wages, through the end of the quarter in which you return to at least 80% of your gross receipts as compared to the prior year. This is a bit technical, so let us take a look with you to see how we can help you to maximize this credit.

We’re still waiting on the SBA to finalize its guidance on how to apply for this credit, but that doesn’t mean we can’t get a good idea of how much you should be able to claim once the instructions are provided. Since these guidelines are outlined in the CAA, we know that this credit will be available based on these parameters.

Now, moving into 2021! This is where things get really good, because the 2020 change is just the present your grandma gave to you on Christmas Eve. The 2021 changes make up the whole pile of presents under the tree! Note that these changes apply only to January 1, 2021 – June 30, 2021. They are not retroactive to 2020.

In order to qualify for the ERC in 2021, you only need to show a 20% reduction in Q1 or Q2 revenue when compared to the same time periods in 2020, as opposed to the previous 50% reduction requirement comparing 2020 revenue to 2019. This may make eligibility for the credit significantly easier to attain. You can also qualify if you were subject to a mandatory government shut down. But given that restrictions have been loosening, we expect many will find the 20% reduction easier to come by.

Here’s where it gets even better. Instead of receiving a 50% wage credit as was the case in 2020, businesses can now claim 70% of the first $10,000 paid per employee. Further, instead of a $10,000 ceiling for the entire year as was the case in 2020, this credit applies to the first $10,000 per quarter! So, what would have been a $5,000 credit in 2020 could be as much as $14,000 in 2021. Scale that up to 10, 20, or 50 employees and we’re talking some serious cash here.

Oh, and one more present behind the tree. There’s a built-in, automatic qualifier for the first quarter of 2021. If your gross receipts in the fourth quarter of 2020 were reduced by at least 20% by comparison to Q4 2019, you automatically qualify for the ERC in the first quarter of 2021.

Note that the no-double-dipping rule still applies vis-à-vis the PPP Round 2. You’re still eligible to get a second PPP “draw”, but you can’t use those dollars to pay for wages for which you’ll also take the ERC. Sorry. Let us help you work through this to ensure you maximize your credit while staying within the parameters of these new rules.

What this does mean though is that effective 1/1/2021 until such time as you’re able to procure a PPP loan, all wages will qualify for the credit calculation. Once that second PPP loan arrives, then you’ll need to break out which dollars go towards the 60% required to obtain loan forgiveness and which dollars count toward the credit. Again, we’re happy to work through this with you.

We understand you may have questions. Although we are still awaiting further guidance from the SBA, we are happy to discuss what we know at this point and guide you through the process of applying for these credits when that information is available. This summary is up-to-date as of January 19, 2021 and we will continue to follow along and provide updates as additional information comes available.