At its height, COVID-19 hit businesses hard. The supply chain slowed, staff may not have been able to work due to stay-at-home orders, and customers spent less money.
Businesses subsequently utilized the Employee Retention Credit (ERC or ERTC) to recover from this impact. At first, the credit was only available to a select few — until the Consolidated Appropriations Act, approved at the end of 2020, made ERC modifications. These modifications expanded the pool of businesses that could claim the ERC.
What is Employee Retention Credit?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the ERC in March 2020. With unemployment on the rise and companies shutting down, the government stepped in.
To provide relief for businesses, the ERC incentivized employers to keep employees on their payroll through a tax refund that covered up to $10,000 in wages per employee for qualified businesses. This helped with expenses like employee wages and employer taxes.
This initial version of the ERC excluded a lot of businesses that did not meet the eligibility requirements. For example, many businesses had already accepted PPP, or Paycheck Protection Program, loans. The CARES Act prevented businesses from simultaneously collecting PPP loans and ERC.
Then, Congress introduced the Consolidated Appropriations Act.
ERC Modifications Through the Consolidated Appropriations Act
The Consolidated Appropriations Act (CAA) passed in December of 2020. Its purpose was to modify several sections of the CARES Act to account for changes in the state of the pandemic. Sections 206 and 207 of CAA detailed The Taxpayer Certainty and Disaster Tax Relief Act, which made several ERC modifications to accessibility to ERC benefits and how businesses could use them in 2021. Some changes even applied 2020 retroactive claims for businesses that had not yet filed for the ERC.
Gross Receipts
The CAA clarifies the issue of tax-exempt organizations calculating their gross receipts, which involves their total sales, income from investments, and any income from provided services.
Under the CARES Act, eligible employers had to show evidence of a 50% decrease in gross revenue compared to the corresponding quarter in 2019. The CAA changed this to a 20% decrease in gross revenue per quarter for 2021.
PPP Loans
Although the CARES Act prohibited companies from claiming the ERC if they’d already taken a PPP loan, the CAA reversed this. Now, employers can claim the ERC in addition to their PPP loan.
Qualified Wages
The CAA also clarified the definition of qualified wages for the ERC, making alterations to the previously set rules. With the change in PPP loan rule, the CAA prohibited “double dipping” with the PPP loan and the ERC.
It also stated that qualified wages could include healthcare expenses, even if the employer paid no other wages to the employee during that period.
Business Size
Under the CARES Act, any business with 100 or fewer employees was considered a small business. With the CAA, any business with 500 or fewer employees is considered a small business. Small businesses may account for all wages when claiming the ERC.
Credits
The maximum credit in 2020 capped at $5,000 per employee for the year, and this limit was raised to $7,000 per employee per quarter under the CAA. The percentage of qualified wages companies could claim was raised from 50% to 70%.
Credit also became available to recovery startup businesses — companies that began business after February 15, 2020.
Want to Claim the ERC? Contact a Skilled Tax Attorney at Dayes Law Firm
At Dayes Law Firm, we’ve kept track of all the ERC modifications so you don’t have to. Our team of tax attorneys will help you apply for the ERC, just as we have for hundreds of businesses.
Contact us at (800) 503-2000 for a free consultation today.