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Favorable Retroactive Changes to the Employee Retention Credit

January 12, 2021
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When Congress passed the CARES Act in March 2020, it included the Employee Retention Credit (ERC). This credit was created to reward businesses that continued to pay their employees, even though their business operations were either fully or partially suspended by a governmental order as a result of COVID-19 (only for the period that the order was in force), or whose gross receipts were less than 50% of the gross receipts for the same quarter in 2019, until the quarter in which the gross receipts are at least 80% of the gross receipts for the same quarter in 2019. A company with more than 100 employees could not take the credit for wages paid to employees who were actually performing services for the company. The ERC was limited to 50% of an eligible employee’s wages, up to an annual cap of $10,000 of wages, for a maximum credit of $5,000. However, the ERC was not available to a business if it had received a PPP loan. Thus, many businesses were unable to take advantage of the ERC.

On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law. Included in the law were a few changes to the ERC that allows many businesses to take advantage of this credit retroactively, as well as prospectively. The biggest change allows eligible businesses to apply for the credit even though they obtained a PPP loan in the past. However, the credit cannot be claimed for any wages paid with the proceeds received from the PPP loan.

Among the other changes allowing more taxpayers to obtain this credit are as follows:

  • The period that the credit is available has been extended to qualified wages paid before July 1, 2021. The previous limitation was for wages paid before January 1, 2021.
  • For 2021, the eligibility requirement has been changed to include businesses whose operations were either fully or partially suspended by a governmental order as a result of COVID-19 (only for the period that the order was in force), or whose gross receipts were less than 80% of the gross receipts for the same quarter in 2019.
  • For wages paid in 2021, the credit is increased to 70% of an eligible employee’s wages, up to $10,000, for each of the first two quarters. Thus, an employer can obtain up to $14,000 of ERC for each employee ($7,000 per quarter x 2 quarters). An employer is eligible for the full credit in 2021, even if they received the $5,000 credit in 2020.
  • Prior to 2021, a business with more than 100 employees could not take credit for wages paid to employees actually performing services to the business. As of 2021, this threshold is increased to 500 employees. Thus, a business, with 500 employees or less, will be eligible for the credit even if the employees are working.
  • The credit is now available for hazardous pay increases, such as increase in wage rates to reward employees for working during the pandemic. The prior law did not allow this.
  • For 2021, public colleges and universities, medical or hospital care organizations and federal credit unions are eligible for the credit. These organizations were not eligible in 2020.

Many businesses are now eligible for significant ERC credits for 2020, as well as 2021, as a result of these changes. Should you have any questions, please reach out to your Citrin Cooperman advisor.