On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law. A significant revision in this law involves extending and expanding an existing provision from prior 2020 Federal COVID-19 legislation regarding the employee retention credit.
The CARES Act passed in March 2020 established the following two incentive programs that provide funds to businesses allowing them to keep employees on the payroll through the pandemic:
- The Paycheck Protection Program (PPP)
- The Employee Retention Credit (ERC)
NOTE – If a business took advantage of PPP under the CARES Act, they were not allowed to take advantage of the ERC.
The Extension and Expansion of the ERC under the CAA
- The CAA expanded ERC by allowing businesses that took advantage of the PPP to claim the ERC retroactively on wages not forgiven under the PPP (this change is retroactive to wages paid March 13, 2020 to December 31, 2020).
- Qualified wages paid from March 13, 2020 through June 30, 2021 can give rise to an ERC even if the business obtained a PPP loan, or plans to obtain a PPP loan to cover payroll costs, with a provision that any wages on which an ERC is computed are not forgivable under the PPP loan;
- There is a special rule in the CAA that allows a business to capture the retroactive ERC benefit in Q4 2020 for the qualified wages not forgiven under the PPP loan during the period of March 13, 2020 and December 31, 2020; and
- Although the IRS has not provided guidance, we anticipate the retroactive ERC for the eligible wages paid in the 2020 calendar year will be reported on the Q4 Form 941 due January 31, 2021.
Additional modifications to the ERC
- More beneficial rules for determining eligible employers by lowering the decline in gross receipts measurement from 50% decline to 20% decline; this provision decrease is applicable only to an ERC measurement for the period from January 1, 2021 through June 30, 2021
- Per employee qualified wages are increased from $10,000 per employee annually to $10,000 per quarter; the increase is only applicable to wages paid from January 1, 2021 through June 30, 2021
- Increase the number of employees needed for an employer to qualify as a large employer from greater than 100 to greater than 500 employees
- Clarification that health plan expenses are wages regardless of whether there are additional wages
- Although governmental employers are generally ineligible to claim the employee retention credit, an exception is added for:
- Code Sec. 501(c)(3) tax-exempt organizations
- Governmental employers that are colleges or universities; and
- Governmental employers that have as their principal purpose or function the provision of medical or hospital care.
- Guidance for an advanced payment of the credit for the taxpayer. The new rules allow the employer to take an advanced payment credit. The advanced payment credit may be elected for any calendar quarter in an amount not to exceed 70% of the average quarterly wages paid by the employer in 2019.
NOTE – To be eligible for the ERC a business must have incurred a decline in gross receipts as previously noted or must have incurred a full or partial suspension of business operations due to a governmental order related to COVID 19. The IRS has provided information on the credit on its website “FAQs: Employee Retention Credit under the CARES Act” webpage ( http://(https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act))
We expect this webpage will be revised accordingly with the revisions in the CAA.
Please contact the following team members as you have questions:
Email to MJohnston@nicholscauley.com
Call Michael at 770.461.1115
Email to JCorn@nicholscauley.com
Call John at 404.214.1301
Email to CBailey@nicholscauley.com
Call Chris at 770.422.0598
Email to KJarrett@nicholscauley.com
Call Kirk at 706.237.7990