The Employee Retention Tax Credit (ERTC) provision of the 2020 CARES Act was overshadowed by the PPP loan program, primarily because the original ERTC provisions prohibited an employer with a PPP loan from claiming ERTCs.
The 2021 Consolidated Appropriations Act, passed just weeks ago and most known for allowing businesses a tax deduction for the expenses paid with tax-free PPP funds, made sweeping changes to the ERTC rules as well. Most notably, lawmakers removed the provision disallowing businesses with PPP loans to participate in the ERTC program.
As a result, these valuable credits are now available to more business owners for wages paid in Q1 & Q2, 2021 (and possibly for wages paid in 2020). For more information about the original provisions of this program, see our article here.
Some of the most significant changes made with the 2021 Consolidated Appropriations Act to the ERTC are as follows:
- Businesses who have experienced a full or partial suspension of operations due to a COVID government order or have experienced a significant decline in gross receipts of 20% or more are eligible for a tax credit. For McDonald's Owner/Operators, with respect to defining partial suspension of operations, the impact of closed lobbies and social distancing requirements once lobbies re-opened for dine-in should be considered.
- The available credit is 70% of wages paid to each employee (on maximum wages of $10,000 per quarter per employee) between January 1, 2021 through June 30, 2021.
- The legislation increased the large employer threshold to 500 full-time equivalents for the 2021 credit from the 100 FTE standard applicable to the 2020 portion of the credit. If an employer has less than 500 FTEs in 2019, all wages paid during the first two quarters of 2021 are considered qualified for ERTC calculation purposes (subject to the limitations noted above). For those with more than 500 FTEs in 2019, only wages paid to employees for not performing services in the first two quarters of 2021 are considered qualified for the ERTC.
- Employers cannot take a tax credit on wages paid with PPP funds.
- Employers cannot take both ERTC and Work Opportunity Tax Credits (WOTC) on the same wages.
- Nonprofit organizations also can claim this credit.
The table provided below summarizes the old vs. new ERTC provisions:
|
|
OLD |
NEW |
|
Dates applicable |
3/12/2020-12/31/2020 |
Extended through 6/30/2021 |
|
Credit rate |
50% |
70% |
|
Maximum wages eligible |
$10,000 per employee annually |
$10,000 per employee per quarter |
|
Significant decline defined |
50% or more |
20% or more |
|
Large employer threshold |
> 100 FTEs |
> 500 FTEs
|
|
PPP loan recipients |
Originally not eligible for ERTC (Now eligible) |
Eligible for ERTC
|
Because of the retroactive provision allowing PPP loan recipients to as be eligible for ERTC, some of you may be eligible for credits on wages paid between March 12, 2020 through December 31, 2020.
One additional point to mention is that these credits are taken on your entity’s payroll tax returns rather than on income tax returns as you have been accustomed to seeing with WOTC, etc. If you are eligible for credits on 2020 wages paid, amended payroll tax returns will be necessary.
Please note that this program has a relatively short horizon with these credits only available on wages paid through June 30, 2021. Please contact us for information on how to get started.
Read more about other changes in the 2021 Consolidated Appropriations Act affecting businesses:
New Federal Stimulus Deal Includes New PPP, Other Business Benefits
Second Stimulus Offers More Business Benefits, Tax Credits
COVID Tax Relief Measures: What’s Extended for Businesses into 2021
