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Urgent Update about the Employee Retention Tax Credit: 2/2/2021

February 02, 2021

Following is important information about the Employee Retention Tax Credit (ERC). Previously, if you received a PPP loan you could not take advantage of the ERC. However, with the new legislation, you can take the ERC even if you received PPP funding and loan forgiveness as long as the payroll identified for the ERC was not paid out of PPP funds. So if you received PPP funds for your business, you should revisit your eligibility for this tax credit because you may now be eligible for ERC money!

Employee Retention Tax Credit Program

New legislation from the Consolidated Appropriations Act, 2021 creates a chance for more businesses to take advantage of both Paycheck Protection Program (PPP) loans and the Employee Retention Credit (ERC). The significant changes that affect small businesses include:

  • Extension of the ERC through June 30, 2021 (the 2021 rules are different from the 2020 rules as noted below)
  • Employers that received a PPP loan and were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020 if they meet the eligibility criteria
  • Favorable rule changes for credits claimed on 2021 qualifying quarters include:
    • Increased credit rate from 50% to 70% of qualified wages
    • Increased the limit on per-employee qualified wages from $10,000 for the year to $10,000 for each quarter. For 2021 this means up to $7000 per employee, per quarter. 
    • Reduced year-over-year gross receipts decline from 50% to 20% and
    • Created a safe harbor to allow employers to use prior-quarter gross receipts to determine eligibility

Your business is eligible if:

  • You were fully or partially suspended due to an order from a governmental authority limiting travel, business and meetings during the quarter of payroll not paid out of PPP funds, or:
  • You had a reduction in gross receipts of 50% or more (20% or more for 2021) during a calendar quarter compared to the same calendar quarter in 2019

PPP loan forgiveness planning and the ERC

When the covered period for PPP loans was extended to 24 weeks, many business’ applications for debt forgiveness qualified for 100% forgiveness on payroll alone without considering the other eligible nonpayroll costs. However, those other costs now may play a big role in receiving the ERC benefit. For the sake of forgiveness calculations, analyzing the ratio of payroll and nonpayroll costs is a critical step. If sufficient nonpayroll costs are available, limiting payroll costs to the 60% threshold required for full forgiveness may allow the remaining payroll to be eligible for the ERC provided relief.

Please don’t hesitate to reach out to us if you need assistance in determining if you are eligible or if you would like assistance in performing the calculations and filing the required forms. If you received PPP funds, you need to check!