The Paycheck Protection Program supplied forgivable loans to businesses with fewer than 500 employees. If a business took advantage of the program, they were barred from taking advantage of the second incentive, the Employee Retention Credit (ERC). Businesses who borrowed a PPP loan can now go back and claim the ERC for 2020.
The ERC is a refundable payroll tax credit that was only available to taxpayers who either:
- had their business fully or partially suspended during at least one quarter in 2020 OR
- had a drop in gross receipts for quarters in 2020 relative to the same quarters in 2019.
An employer can claim a refundable payroll tax credit of up to $5,000 per employee for wages paid between March 12 and December 31, 2020, but only for wages paid during a calendar quarter in which the business is either:
Shut down by government order
- For any quarter in 2020, the operation of the employer’s trade or business must have been fully or partially suspended during the quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings for commercial social, religious, or other purposes, due to COVID-19. (will only get a credit on wages paid during the part of the quarter the business was shut down).
OR
Experiencing a large drop in year-over-year gross receipts
- For any quarter in 2020, the gross receipts from the trade or business of the employer must be less than 50% of what they were for the same quarter in 2019. Once this happens, every quarter is an eligible quarter until the end of the quarter in which the business’s receipts have returned to at least 80% of what they were for the same quarter in 2019.
ERC CHANGES 2020 to 2021
- Increases the credit percentage from 50% to 70% of qualified wages
- Increases the maximum amount of creditable, qualified wages to $10,000 for ANY quarter (instead of ALL quarters) For example, in 2020, if A were paid $10,000 in Q3 and $10,000 in Q4, the resulting credit would be $5,000 (capped at 50% of $10,000 in total wages). In 2021, however, if A were paid $10,000 in Q1 and $10,000 in Q2, the resulting credit would be $14,000 (70% of $10,000 wages for each quarter).
- The eligibility test is satisfied for any quarter of the first half of 2021 in which gross receipts is less than 80% of the same quarter in 2019. Thus, in the first quarter of 2021, a business would compare its receipts in that quarter to the first quarter of 2019, not the first quarter of 2020.
- The new law then gives businesses – for 2021 only – the option to elect to satisfy the gross receipts test by looking at the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019.