The employee retention credit (ERC), first introduced as part of the CARES Act, was expanded and modified under the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021. Learn what those changes could mean for you.
The Consolidated Appropriations Act (CAA) enacted in December 2020 expanded and modified many important benefits initially introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March 2020. Companies may significantly benefit from revisiting provisions that were initially limited but now have greater reach, particularly the employee retention credit (ERC). The American Rescue Plan Act of 2021 (ARPA) enacted in March 2021 further enhanced and extended the applicability of the ERC.
As originally introduced, the ERC provided qualifying employers the opportunity to claim a 50% refundable credit based on up to $10,000 of payroll costs for qualifying employees (i.e., a maximum $5,000 per employee credit) provided various requirements were met. However, companies were restricted from claiming any ERC if they also obtained a loan through the Paycheck Protection Program (PPP). The PPP had the potential to be fully refundable (becoming the economic equivalent of a grant) and could potentially offset far more than $5,000 per employee. Therefore, it’s unsurprising that many companies opted to pursue a PPP loan and forego opportunities to claim the ERC.
A significant change under the CAA is that companies that obtained a PPP loan are now retroactively eligible to also claim the ERC for qualifying expenses during 2020, although there are still limitations on being able to claim the credit with respect to the same payroll expenses also funded with forgiven PPP loan proceeds. In addition, the ERC was further expanded to allow for additional credits (70% of up to $10,000 payroll costs for qualifying employees per quarter) to be claimed in certain circumstances for each quarter of 2021.
In light of these legislative changes, significant opportunities may exist for companies that:
- Might otherwise have opted not to pursue claiming the ERC in 2020 to revisit their eligibility.
- Claimed the ERC in 2020 to determine whether additional credits are available given the relaxation of various rules.
- Believe they may be eligible for the ERC in 2021 to prepare for their claims and, potentially, request an advance payment, if eligible.
Following are some key considerations that companies, with the assistance of their advisors, should be considered in assessing ERC opportunities:
Was the business “fully or partially suspended” due to a governmental order during any quarter of 2020, and/or 2021? As one of the paths to claiming the credit is to have had a suspension of business operations resulting from a government order, companies should identify the actual order and governmental branch or agency that issued it and assess that it did, indeed, require their operations to be suspended. Further, where a business reduced or modified its operations in response to an order, an analysis should be performed to determine whether such modification could qualify as a “partial suspension” of the business.
Was there a “significant decline” in gross receipts in any quarter of 2020 or 2021? An alternative path to ERC eligibility is to show a significant decline in revenue versus a comparative quarter in 2019. Analyzing whether this condition is met could involve some unanticipated complexities, including determining what streams of income constitute gross receipts for purposes of the ERC and, in the instance of a business that has related entities, determining at what level business should be aggregated for purposes of determining the gross receipts versus the comparative quarter in the prior year.
- For the 2020 ERC: If the gross receipts of any quarter in 2020 were less than 50% of the corresponding quarter of 2019, the ERC is available in that quarter. The ERC is also available in each subsequent quarter of the year, until gross receipts were at least 80% of the corresponding 2019 quarter. Modified rules apply to businesses that began operations sometime during 2019 or for businesses that were acquired during 2020.
- For the 2021 ERC: If the gross receipts of any quarter of 2021 are less than 80% of the corresponding quarter of 2019, the ERC is available in that quarter. Businesses may elect to use the gross receipts from the prior calendar quarter for this test. For example, to determine ERC eligibility in Q1 of 2021, the business may compare its gross receipts from Q4 of 2020 to those from Q4 of 2019. Additionally, businesses that weren’t in existence in 2019 may compare their 2021 gross receipts to the corresponding quarter of 2020.
Were the average monthly full-time employees (FTEs) in 2019 greater than 100 or 500? The ERC in 2020 has tighter restrictions for companies that had more than 100 full-time (working over 30 hours per week or 130 hours per month) employees in 2019, while the 2021 ERC has comparable restrictions for companies that had more than 500 full-time employees in 2019. In particular, for those companies, the ERC is limited to situations where employees were paid while not actually performing services, or where health insurance premiums were paid for employees not otherwise receiving wages (i.e., furloughed employees). Thus, the FTE count impacts the credit available in 2020 and 2021 but is based solely on the employment numbers from 2019. Determining whether the “100 FTE” or “500 FTE” threshold is crossed may be complicated by situations where the business entity is related to other entities where, in combination, they may exceed the threshold. The actual determination of FTEs may also be complicated in situations where there were part-time employees or significant changes in headcount during 2019.
What payroll costs were paid for with PPP loan proceeds and to what extent were those proceeds forgiven or expected to be forgiven? The CAA modifications to the ERC are designed to prevent claiming a credit where the payroll expenses are paid from forgiven loan proceeds (i.e., avoiding “double dipping”). Careful analysis will be required to trace the use of forgiven (or expected-to-be-forgiven) PPP loan proceeds and determine the portion of ERC-qualifying payroll costs that weren’t funded with such proceeds. Guidance is still pending on how the ERC/PPP overlap rules should be applied.
Other areas bringing added complexities for which companies may benefit from assistance include:
- Analyzing the impact of acquiring or disposing of a business during the credit eligibility period (or the 2019 comparative period)
- Coordinating an ERC calculation and claim with other federal benefits, e.g., the Families First Coronavirus Response Act (FFCRA) paid leave
- Amending payroll tax returns (Form 941) for relevant 2020 quarters to claim the ERC
- Determining eligibility for advance payments of anticipated 2021 credits and filing claims for same. The advanced payments are now restricted to businesses that had less than 500 FTEs in 2019, but other options may exist to monetize anticipated credits, such as the retention of payroll deposits.
Employee Retention Credit (2020)
Employee Retention Credit (2021)
The Consolidated Appropriations Act, enacted in December 2020, expanded the scope of the Employee Retention Credit introduced in the CARES Act and now permits qualifying taxpayers to claim the ERC in 2021, irrespective of whether a credit was claimed in 2020. While this is an expansion of the program initiated in 2020, there are new rules that apply specifically to 2021. This flowchart is meant to assist in identifying when the ERC may be available; it’s not a substitute for robust analysis and calculation.