In recent blasts, and during our live webinar on January 21, we touched on various provisions of the Consolidated Appropriations Act (CAA) which was enacted December 27, 2020. Many parts of this Act revolved around extensions or changes to provisions offered in the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March of 2020. Since the CAA’s passage additional guidance and clarity has been released on certain parts of the Act. One of these relates to the Employee Retention Credit (ERC).
As you may recall there were several changes to the ERC, which are listed in full detail in the chart below. One of the primary changes involved the need to have a reduction in gross receipts of 20% or more in the first or second quarter of 2021 when compared to the same quarter in 2019 in order to qualify.
Recent guidance issued by the IRS states that when measuring a decline in gross receipts an employer may elect to use the immediately-preceding calendar quarter. This means that when determining eligibility for claiming the credit in the first quarter of 2021 an employer can choose to look at the fourth quarter of 2020 compared to the fourth quarter of 2019.
Likewise, when determining eligibility for the second quarter of 2021 an employer may choose to look at the first quarter of 2021 compared to the first quarter of 2019.
We suspect this guidance has most likely been issued so an employer need not wait until the end of the quarter when filing payroll returns to determine a decline in gross receipts.
An employer is eligible to claim this credit by reducing their 941 payment. If the credit exceeds the 941 payment they may request advance payment of the remaining credit through the filing of Form 7200, but ONLY if they have less than 500 employees; otherwise, they may request a refund when filing Form 941.
| ERC | As Part of the CARES Act | ERC | As Expanded by CAA | ||
| Eligibility | • Must be in operation during the 2020 calendar year | • Must be in operation during the 2020 calendar year | |
| • Must have 100 or fewer employees. If 100 or more employer is still eligible, but must be paying employees NOT to be working | • Must have 500 or fewer employees. If 500 or more employer is still eligible, but must be paying employees NOT to be working; employees of all affiliated companies sharing more than a 50% common ownership must be aggregated | ||
| • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter* OR | • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter* OR | ||
| • The employer’s gross receipts are below 50% of the comparable quarter in 2019. After suffering this reduction in gross receipts, the employer may continue to claim the ERC each quarter until their gross receipts exceed 80% of the amount from the comparable quarter in 2019. | • The employer’s gross receipts are below 20% of the comparable quarter in 2019. An employer may elect to use the quarter immediately preceding to determine eligibility as noted above. | ||
| • The business must not have a PPP loan – SINCE RETRACTED | • The business MAY have a PPP loan | ||
| Dates Available | • Qualified wages paid after March 12, 2020 and before January 1, 2021 | • Qualified wages paid after March 12, 2020 and before July 1, 2021 | |
| Amount Of Credit | • The credit is 50% of the first $10,000 in wages paid to an employee (from date of enactment) for a maximum of $5,000 per employee, per year | • The credit is 70% of the first $10,000 in wages paid to an employee per quarter for a maximum of $7,000 per employee, per quarter | |
| • Can include the cost to provide health insurance benefits to the employee if they do not reach the $10,000 in wages alone | • Can include the cost to provide health insurance benefits to the employee if they do not reach the $10,000 in wages alone | ||
| Hazard Pay | • No credit for hazard pay increases | • Credit is allowed for hazard pay increases; but not on amounts already covered by state or local funding | |
| Credit For Governmental Entities |
• The credit was not available to any federal, state or local governments | • Effective January 1, 2021 the credit is now available to public colleges or universities, organizations whose principal purpose is providing medical or hospital care, and federal credit unions | |
| Non-Profit Entities | • Eligible to claim the credit, but no definition of what constitutes gross receipts was provided | • Eligible to claim the credit and gross receipts is now defined by Section 6033 of the Internal Revenue Code and includes contributions, gifts, grants, dues or assessments, sale from unrelated business activities, sale of assets and investment income |
* As you are aware, the entire state of Pennsylvania was fully or partially shut down between March and June, 2020 unless you were operating a life-sustaining business. If you operate a life-sustaining business and could operate at full capacity, even via telework, then you were not considered shut down and would therefore need to have a reduction in gross receipts in order to qualify for the ERC. Montgomery, Bucks, Chester and Philadelphia counties shut down March 23, 2020 and did not re-open in the green phase until June 26, 2020. All entertainment businesses, restaurants, gyms, etc. were again shut down from December 12, 2020 through January 4, 2021. Restaurants specifically were pretty much under a partial shut down order (and still are today) as indoor dining is not yet at 100% capacity. If your business operates in the entertainment or fitness industries you should discuss with your accountant if you have been able to operate at full capacity any time since the initial state order to shut down back in March 2020.
A full list of county shut down orders can be found here (about 1/3 of the way down the page).
A list of counties in green vs. yellow phases (as of June 12, 2020) can be found here – Bucks, Delaware, Chester and Montgomery entered green on June 26; it was noted that Philadelphia kept some restrictions in place until July 3.
Governor Wolf’s December shut down order can be found here.
Other items of note
Most importantly, the CAA has retracted the statement that a borrower must not have a PPP loan retroactively to the start of the CARES Act. This means that an employer may claim this credit while also having a PPP loan for quarters ending after the passage of the CARES Act (the second, third and fourth quarters of 2020). However, if the employer wishes to retroactively claim the credit it must meet the eligibility requirements established under the CARES Act that ran through the end of 2020. It can only apply the provisions under the CAA for the first two quarters of 2021.
Additionally, although an employer can have a PPP loan and take advantage of the ERC it CANNOT utilize the wages claimed for ERC to also qualify for PPP forgiveness; meaning in order to qualify for full forgiveness and the ERC an employer needs to have wages well in excess of the PPP loan or look to use other eligible expenses for PPP such as rent, utilities, etc.
So what should you be doing as an employer?
- If you meet the qualifications to go back and look at gross receipts in 2020 you should analyze that BEFORE applying for forgiveness on any first round of PPP funding. An amended 941 is the way you will claim this credit.
- If you qualify to claim the credit on wages paid in 2021 you should notify your payroll provider immediately. They can begin the process of reducing your 941 payments and can apply for refunds at the end of the quarter if needed.
As always, we are here to help. We strongly encourage you to reach out to your DunlapSLK team member as you begin to analyze this credit so they can help answer any questions you might have.
Please continue to stay safe and stay healthy!