The Consolidated Appropriations Act, 2021 (the Act), signed into law on Dec 27, 2020, extends and enhances several aspects of the employee retention tax credit initially enacted under the CARES Act in 2020. One of the big headlines is the extension of tax credit eligibility to businesses that received PPP loans in 2020. The tax credit enacted under the CARES Act provides a 50% refundable credit for companies that continue to pay employees through a closure due to lockdown or in the face of declining gross receipts. Last year, businesses had to choose between the employee retention tax credit and a PPP loan. The new law makes 2020 PPP loan recipients eligible for the 50% credit retroactively back to Mar 12, 2020. Here are some of the other significant changes from the Act:
Retroactive Eligibility for Employee Retention Tax Credit
To put a finer point on this change, the Act extends the tax credit for qualified wages paid to employees to Jul 1, 2021, from Jan 1, 2021. Under the CAREs Act, businesses whose operations were either fully or partially suspended due to a lockdown order, or whose gross receipts for any quarter in 2020 were less than 50% for the same quarter in 2019, were eligible for the tax credit as long as they did not receive a PPP loan. That restriction extended to the PPP loan recipient as well as any affiliated companies with more than 50% common ownership.
Under the Act, PPP loan recipients are no longer prohibited from claiming the employee retention tax credit for qualified wages paid after Mar 12, 2020. However, to prevent double-dipping, the qualified wages paid must be in excess of wages paid using PPP funds. This includes affiliated companies that couldn’t file a claim due to the common ownership interest in a PPP recipient company. PPP recipients that were ineligible in 2020 may now file an amended 941 return to claim the credit.
New Eligibility Requirements for the Tax Credit in 2021
Under the CARES Act, businesses became eligible for the employee retention tax credit when their operations were fully or partially suspended by a lockdown order or incurred a loss of gross receipts of more than 50% over the same quarter in 2019.
Starting on Jan 1, 2021, the threshold for eligibility has been lowered from a 50% reduction in gross receipts to a 20% reduction compared to the same quarter in 2019.
Tax Credit Increases in 2021
Initially, the amount of tax credit available was 50% of the qualified wages paid to an employee, plus the cost of continuing health care benefits.
Starting on Jan 1, 2021, the new law increases the tax credit cap from $10,000 for all qualified wages paid in 2020 to $10,000 for all qualified wages paid in each of the first two quarters. The Act also increases the amount of the credit from 50% in 2020 to 70% for 2021. That effectively increases the total annual amount of tax credit available from $5,000 to $14,000.
Credit Now Available Even When Employees are Working
Under the CARES Act, companies with an average of 100 full-time employees or less in 2019 were eligible for the credit even if the employees were performing services for the employer. Not so for companies with more than 100 full-time employees, where the credit only applies to wages paid not to work.
Under the new law, companies with 500 full-time employees or less are eligible for the credit even if their employees work in the first two quarters of 2021. Companies may include employees from affiliate companies with a 50% shared ownership interest.
Advance Tax Credit Payments
The new law adds a provision allowing companies with 500 full-time employees or less to request an advance payment of the credit equal to 70% of the average quarterly payroll for the same quarter in 2019. The company must repay any part of the payment advance that exceeds the actual credit calculated at the end of the quarter.
Pay Rate Increases Now Included as Qualified Wages
For 2021, Companies that pay bonuses or increase employee wages as hazard pay may now include those increases as qualified wages, subject to the $10,000 per quarter cap.
Eligibility for Governmental Entities
Under the CARES Act, federal, state, or local government entities were not eligible for the employee retention tax credit. The Act now makes the credit available for state or local colleges and organizations providing medical care. It also includes specific organizations chartered by Congress.
Those are the highlights of the enhancements of the employee retention tax credit, which is likely to impact most businesses that received PPP funds and many that did not. However, as with most tax legislation involving business tax credits, the eligibility and computational aspects can be confusing, especially when claiming the credit retroactively for 2020. We encourage you to contact a Glass Jacobson advisor today to discuss how the changes will impact your business.