In the past year, COVID-19 relief measures have changed frequently to keep up with the evolving needs of individuals and businesses struggling through the pandemic. For example, under the provisions of the Consolidated Appropriations Act of 2021, the Employee Retention Tax Credit can now be used in combination with a Paycheck Protection Program loan, creating a new opportunity for businesses who previously had to choose between the two programs.
Even with this rule now in place, according to a recent
Prior to the Consolidated Appropriations Act, the ERTC allowed eligible employers to obtain a payroll tax credit for retaining employees during the pandemic, paid after March 12, 2020, and before Jan. 1, 2021. In 2020, the program was open to all employers who met eligibility requirements, regardless of size, with two exceptions: state and local governments and small businesses who took PPP loans that have not been repaid by May 18, 2020. Per 2020 rules, eligible employers could claim 50 percent of qualified wages paid up to $10,000 (including certain health care costs) per employee between March 13, 2020, and Dec. 31, 2020, with a maximum credit amount of $5,000 per employee for the year.
Several changes to the ERTC have expanded eligibility and accessibility, making it an increasingly attractive option to consider as accountants are discussing pandemic relief with clients. For one, effective Jan. 1, 2021, the deadline to claim the ERTC was extended through June 30, 2021. State and local governments are now eligible to claim the ERTC, as are employers who did not exist in 2019 — they can use the corresponding quarter in 2020 to measure the decline in their gross receipts. The 2021 credit amount has also changed. It is now 70 percent of qualified wages paid in 2021 with a maximum credit amount per employee of $7,000 per quarter (a total of $14,000 per employee).
Additionally, retroactive to March 2020, small businesses who took a PPP loan are now eligible and may retroactively claim the credit. The credit cannot be taken on wages used toward PPP loan forgiveness.
For employers claiming the ERTC for 2020 this tax season, there are several assumptions for eligibility that accountants will need to confirm before filing. Employers will need to indicate that they were forced to close due to a government order or that their gross receipts had declined by at least 50 percent from the comparable quarter in 2019.
Let’s use the example of a business claiming the ERTC for the second quarter: The business was mandated to shut down per government order for a period during the second quarter of 2020. The business received a PPP loan on June 1 and has already received forgiveness. The PPP loan was for $200,000, payroll costs paid/incurred total $200,000 and non-payroll costs paid/incurred total $80,000 (the payroll costs only include qualified wages, and any other payroll costs, state and local taxes, retirement, etc. are not included). The forgiveness application indicated $200,000 in payroll costs and $80,000 in non-payroll costs. As a result, the employer would be eligible to claim the ERTC on $80,000 of qualified wages. A Form 941-X would be filed with the IRS to amend the 2Q20 filing and claim the retention credit.
As with anything related to COVID-19, these latest rules are already being updated with new regulations. The American Rescue Plan Act of 2021 extended the ERTC again through Dec. 31, 2021. More and more, accountants serve as their clients’ eyes and ears around new legislation that could impact their business. As many businesses continue to feel the financial impacts of COVID-19, the ERTC can be a powerful tool to help them keep employees on board, so it’s critical that they are made aware that this is now an option available to them in combination with the PPP.
