The recently enacted Consolidated Appropriations Act includes an important change in how the previously offered Employee Retention Credit (ERC) is treated for small businesses who also borrowed through the Paycheck Protection Program (PPP). The two programs were mutually exclusive – you could take advantage of one or the other, but not both. But the new provision now allows some businesses to retroactively claim an Employee Retention Credit for 2020.
PPP loans were limited to borrowers with 500 employees or fewer, while the ERC was available to companies of any size that had their business fully or partially suspended or suffered a steep drop in gross quarterly revenues in 2020. The maximum ERC credit of $5,000 per employee was for qualified wages, and the computation differed for companies with more than 100 full-time equivalent employees.
Section 206 of the Consolidated Appropriations Act has changed the eligibility of a business which can claim the ERC for the period of March 12, 2020 and December 31, 2020, although the computational restrictions remain the same. However, you cannot claim the ERC on wages that have been paid using the proceeds from a PPP loan – no double dipping.
ERC Extended and Enhanced
Section 207 of the Act not only extends the ERC through July 1, 2021, it changes the way in which qualified wages are computed during the extended period.
To be eligible for the ERC in 2021, a company’s revenues must fall more than 20% compared to the same quarter in 2019 – before the pandemic cratered the economy. For each quarter you are eligible the ERC has changed from a maximum of $5,000 per employee to 70% of the first $10,000 paid per eligible employee, per quarter. You must apply for the ERC with your quarterly payroll tax filings.
There are multiple restrictions and provisions on which part of your payroll is eligible for Employee Retention Credits in 2020 and 2021, particularly for companies with more than 100 full-time equivalent employees. But the bottom line is that the breakdown of the barrier between PPP and ERC could offer significant opportunities for tax savings. For additional information or help in calculating your potential for applying for the ERC, please contact Gray, Gray & Gray at (781) 407-0300.