Consolidated Appropriations Act: Changes to the Employee Retention Tax Credit

The Consolidated Appropriations Act, 2021 (CAA) is a $2.3 trillion spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic in the United States, with a $1.4 trillion omnibus spending bill to fund the operation of certain agencies in the Federal Government for 2021 to prevent a government shutdown.

The CAA, which was signed into law on December 27, 2020, contains a plethora of tax goodies in it, with the most significant being the clarification that forgiven PPP loans are NOT taxable. The CAA also includes two provisions that clarify and expand the Employee Retention Credit (ERC) that was created by the CARES Act. These provisions provide:

• Section 206 of the law changed who may claim the ERC – but not the computational rules – for the period March 12, 2020, through December 31, 2020.
• Section 207 of the Act extends the ERC, which was originally slated to expire at the end of 2020, until July 1, 2021; however, Section 207 dramatically changes the computational rules for the final six months of the program.

Most employers did not utilize the ERC as it was not allowed under the original CARES Act if the business took a PPP loan. Now with the CAA, you can have a PPP loan and take the ERC.

Employee Retention Credit Qualifications

Per Section 206 of the reformed ERC, 2020 wages not used for PPP loan forgiveness can be used to qualify for the credit. 50% of wages up to $10,000 per employee per year can be taken as a credit for 2020.

For 2020 wages to qualify, one of two criteria must be met.

1. Either the employer suffered a greater than 50% reduction in gross receipts for a quarter compared to 2019, or
2. The business was subject to a mandatory shutdown (including partial shutdowns).

If they have under 100 employees in 2019, the ERC is more advantageous. Employers with over 100 employees in 2019 only get the credit for wages paid to employees NOT working. Those with 100 or fewer employees in 2019 get to take the credit on all wages paid. Those employers who qualify under the gross receipts threshold will continue to qualify each quarter until the quarter after gross receipts exceed 80% of the 2019 amounts.

Section 207 enhances the ERC for 2021 and extends it through June 30, 2021. The credit rate goes up to 70% of $10,000 per employee per quarter. Section 207 also greatly reduces the gross receipts’ threshold required to take the credit. Going forward in 2021, any quarter where the gross receipts are under 80% of the corresponding quarter in 2019 will be eligible. Those businesses shut down by the government continue to qualify under Section 207. For 2021, all employers with under 500 employees in 2019 are treated the same. They all get credit for wages paid for both working and non-working employees, up to $10,000 per employee per quarter limitation.

Below is a summary of the benefits for each section for each year.

Your BMF Advisor is available to help you determine the applicability of your unique situation. Contact us if you have questions on these changes or how your tax status could be impacted.