Employee Retention Tax Credit May be Available Retroactively

PPP Borrowers may want to delay applying for Loan Forgiveness

The Consolidated Appropriations Act (CAA) approved last month provides that the Employee Retention Tax Credit (ERTC) is retroactively available to PPP borrowers. Only wages that were not paid with forgiven PPP loan proceeds qualify for the credit. An employer will need to elect which period of payroll expenses to apply toward the credit versus those forgiven as part of the PPP loan cancellation. PPP loan borrowers should wait for the IRS and Treasury Department to issue guidance on how to retroactively receive this credit before applying for PPP loan forgiveness.

In March 2020, the CARES Act provided that private sector employers are allowed a refundable tax credit against employer Social Security tax equal to 50 percent of wages paid by employers to employees during the COVID-19 crisis, up to $10,000 in wages per employee (i.e., a $5,000 credit per employee). Employers qualified if their operation was fully or partially suspended due to orders from a governmental authority related to COVID-19, or who experienced a 50 percent decline in quarterly gross receipts compared to the same prior year period. The credit is increased by the proportionate share of employer’s health costs related to such wages.

For 2021, The Employee Retention Tax Credit is Extended and Revised.

From January 1, 2021 through June 30, 2021, the credit is expanded to 70 percent (from 50 percent) of qualified wages. The wage limitation is increased from $10,000 per year to $10,000 per quarter; i.e., the maximum credit per employee in 2021 is $14,000.

Employers are also eligible if they can demonstrate revenue declines of 20 percent (formerly 50 percent), and employers may also use prior quarter gross receipts to determine eligibility.

Importantly, the CAA provides that employers who receive PPP loans may qualify for the ERTC for wages that are not paid with forgiven PPP loan proceeds. Prior to enactment, PPP borrowers were not eligible for this credit unless they had repaid the loan in full by May 18, 2020.

Eligibility is also expanded to certain public instrumentalities, such as public universities, hospitals and medical care providers, and new rules permit new employers not in existence in 2019 to claim the credit. Originally the CARES Act provided that for employers with more than 100 employees the credit was only available for wages paid to employees for which no services were provided (i.e., for paid time off). Employers with 100 or fewer employees were eligible for the credit for all wages paid; i.e., for time worked, in addition to paid time off. This 100-employee threshold for determining qualified wages is now changed to 500 for 2021.