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Employee Retention Credit (ERC) Important Changes For PPP Loan Recipients


Wayne Naegele

February 8, 2021

Dear Clients, Colleagues and Friends,

By this point, many of us are familiar with some of the key highlights of the Consolidated Appropriations Act, 2021 (CAA) which was signed into law on December 27, 2020. Some of the key highlights include a new round of PPP Loans, new stimulus payments and streamlined forgiveness for PPP Loans under $150,000. Among the numerous items in the 5,593 page bill is a key change to the Employee Retention Credit (ERC). This has the potential to yield significant refundable tax credits for eligible employers.

The ERC is a Federal payroll tax credit created under the CARES Act, which was signed into law on March 27, 2020. The ERC was originally available for eligible employers who did not receive a PPP loan. At first, the ERC did not attract much interest since most eligible businesses applied for and received PPP Loans. The CAA not only extended the credit to June 30, 2021, but also removed the restriction that PPP Loan recipients were not eligible to claim the credit.

An important item to consider is qualified wages used for PPP Loan forgiveness may not be used as qualified wages for ERC purposes. PPP Loan recipients must now carefully consider maximizing their non-payroll expenses on their PPP Loan forgiveness application(s) to ensure they have sufficient excess qualified wages to claim the ERC. If you have not yet applied for PPP Loan forgiveness, we recommend that you do not submit your application until you analyze and address this important issue.

Considerations for claiming the ERC in 2020

To be eligible to claim the ERC in 2020, an employer must satisfy one of the conditions below:

Operations were fully or partially suspended on orders from a governmental authority due to Covid-19.

  • You no longer qualify once the shutdown order is lifted. 
  • Please note that businesses whose offices were mandated to be closed but continue all of their operations remotely do not qualify under the governmental shutdown condition.
  • There are some businesses such as restaurants that will most certainly qualify, but others may have to analyze the impact of the governmental shutdown order to their business operations to determine if their business was fully or partially suspended for purposes of claiming the ERC.

Experienced a significant decline in gross receipts of more than 50% during any calendar quarter in 2020 when compared to the same calendar quarter in 2019. You will continue to qualify for the ERC until your gross receipts in a calendar quarter in 2020 return to 80% of the same calendar quarter in 2019.

  • For Example, if Q2 2020 sales decreased more than 50% when compared to Q2 2019, a business is eligible to claim the credit for Q2 2020 & Q3 2020. If gross receipts for Q3 2020 return to at least 80% of what they were in Q3 2019, Q3 2020 would be the last quarter a business can claim the credit in 2020. 

Employers who average 100 or fewer employees on a monthly basis may claim the credit on wages and qualified health plan expenses paid for employees whether or not the employee performed services. Employers who average more than 100 employees may only claim the credit for wages and qualified health plan expenses paid for employees who did not perform services.

The maximum amount of the credit is 50% of qualified payroll costs of up to $10,000 for each employee for all eligible quarters, which could result in a maximum credit of $5,000 for each employee for the year. For 2020, eligible employers can claim their ERC by filing an amended Form 941 for each eligible quarter.

Considerations for claiming the ERC in 2021

There are numerous changes made to the ERC for 2021.To be eligible to claim the ERC in 2020, an employer must satisfy one of the eligibility criteria thresholds below:

Similar to 2020, operations were fully or partially suspended on orders from a governmental authority due to Covid-19.

  • You no longer qualify once the shutdown order is lifted. 
  • Please note that businesses whose offices were mandated to be closed but continue all of their operations remotely do not qualify under the governmental shutdown condition.
  • There are some businesses such as restaurants that will most certainly qualify, but others may have to analyze the impact of the governmental shutdown order to their business operations to determine if their business was fully or partially suspended for purposes of claiming the ERC.

Experienced a significant decline in gross receipts of more than 20% during either Q1 2021 or Q2 2021 when compared to the same calendar quarter in 2019 or alternatively by comparing the immediately preceding quarter to the same quarter in 2019 under a new safe harbor provision.

Employers who average 500 or fewer employees on a monthly basis may claim the credit on wages and qualified health plan expenses paid for employees whether or not the employee performed services. Employers who average more than 500 employees may only claim the credit for wages and qualified health plan expenses paid for employees who did not perform services.

The maximum amount of the credit is 70% of qualified payroll costs of up to 10,000 for each employee per quarter for each eligible quarter, which could result in a maximum credit of $7,000 for each employee for each eligible quarter (potentially $14,000 in total for each eligible employee for Q1 2021 & Q2 2021). For 2021, eligible employers can claim their ERC on their Form 941 for each eligible quarter.

Presti & Naegele can help evaluate if your business qualifies for the ERC and help maximize your potential ERC and PPP Loan forgiveness. 

For all of our COVID-19 updates, please visit our website at www.pntax.com and our COVID-19 updates page at https://www.pntax.com/covid-19/.

If you have any questions or need further information, please contact your Presti & Naegele professional directly, or dial 212-736-0055 for immediate assistance.

Presti & Naegele